Vernal Express | 1978-12-28 | Page 1 | Economy Will Slip into a Recession in 1979

Babson's Forecast Economy will slip into a recession in 1 By w Mills A our forecast for 1978 an- further progress on the business Despite a long coal iSSi terest and the appall ng dec ine In the value of the U.S. dollar against the stronger currencies of the general business did actually display more staying power than had seemed the specter of inflation-about which we had warned- also made its presence felt during the past This cruel pro- ved to be a dual-edged On the one the inflation psychology pro- buying of durable goods and homes in expectation of higher thus sustain the powerful business on the other tion was instrumental in generating the flight from the dollar the quent poor performance of the stock 1978 saw public confidence under- mined by anxiety over the twin forces of inflation and soaring interest rates while there were healthy ad- vances in industrial employ- personal income and corporate 1979 SOME LETDOWN FOIl BUSINESS As 1979 makes its the present in the business cycle is already considerably longer than the average life span of this nation's expansion This does not automatically- and of itself- mean that a trend rever- sal Is but a cyclical upturn has lasted 44 months is obviously After careful consideration of all rele- the staff of Babson's Reports predicts that the American economy will slip into a recession in Until early it appeared that enough business vitality existed to sus- tain the economic through the better part of or at least to avert a setback in the course of the The situation was when the Administration and the Federal Reserve took radical measures to dampen the forces of inflation and to arrest weakneSs of the The chief steps were further terest rates and the tightening of pj implication there might be fur- ther moves if With interest rates extremely prospects are ob- for such economic barometers as Inventory home building and general construe- business capital and consumer purchases of automobiles and other high-priced U ELY Though a recession is now more a distinct likelihood than a mere its probable severity is a matter of A good deal will de- pend not only on much additional pressure the nation's leadership will br- ing to bear upon inflationary forces but also on its degree of To back to soon or to to administer enough pressure could allow inflation to regain momentum perhaps necessitating subsequent measures far more harmful to the economy than a job properly done at this With the economy at its present ex- high the anti-inflation game plan will not produce traumatic Babson's in- a winding down in the business tempo of sufficient intensity and dura- tion to qualify technically as a recession-that at least two sue- calendar quarters of backtrack- ing ln national We look for the real gross national product of goods and services ex to record slippages in the second and third quarters of 1979 after a fairly decent opening with a recovery beginning sometime in the final three Should the scenario work out this the 1979 recession could as well be described as a mild in com- parison with other recessions in our past history of d to be some but this would be a small price to pay compared with what might happen if inflation was allowed to run tW TOO There may be as many reasons for public uneasiness in 1879 as there were in Prices will rise further-though not as sharply as in the past year-arid there will naturally be concern about the effectiveness of the battle against the diminution of business vitality will spawn fears about possible reduced job and less hefty pay checks because of curtailments in overtime and shorter workweeks in 9 full nf iv TheL coM S f be some make some headway for example the status of the dollar could improve lifting the confidence of Investors and businessmen product-on tha basis of current dollars-will undoubtedly trend owing principally to But the gain will be substantially less than that of Activity in the credit-dependent sectors of the economy will and government spending for most of the twelve months ahead will be more restrained than in past reflecting the new- found concern of the electorate with paring public spending and achieving tax How long this attitude will last under recession pressures remains to be especially the effects upon the country's legislators at all Though the economy may stutter dur- ing some of the real GNP factored still ought to be able to manage a sliver of an increase of about 2 for the year as a PRODUCTION Despite price inflation along a broad front and the sequence of step-ups in borrowing costs in the urge to act before prices advanced even further brought sales of cars and houses last year to a higher level than one would have thought Since de- mand in these-and a number of other- fields represented at least to some degree an advance siphoning from 1979 markets and the incurring of debt in the the task of duplicating last year's results seems With interest rates now even higher and credit supplies the task for the next twelve months will be even more ln is for a on Page Babson's forecast Continued from Page 1 moderate-around backslide from the 1978 Strong showings in out- put of transportation military and computer Sinful g in total industrial BUSINESS The economy will noti during of im will reflect the cost of borrowed money sh a ac slackens Sean The To course to be to possible labor but these will give way to liquidations once the danger is over For the coming year the key con- is that the country will not be confronted with an economic adjust- ment either caused by or intensified by to liquidate redundant Inventory holdings Has spawned many a cyclical business down-phase in the But during the last three and a half inventory policies will not impart much stimulus business in neither will they drag it down MUSINGS CAPITAL EXPENDITURES Business outlays for new plant and equipment lagged markedly in the ear- ly stages of the economic advance that began in the spring of 1975 This was perfectly normal since there was an abundance of productive capacity at that Over the past two lion rates have increasingly strained plant Hising n. operating costs and the ex- with en- v quality regulations nave aiso spurred spending for more em- For the staff of Babson's Reports only a modest ment instead of another smart increase-perhaps amounting to 3 in real terms and about 10 with inflation outlays will still run at a brisk sustained by hefty THE LABOR FRONT 1979 faces a busy schedule of labor negotiations involving a number of Im industries such as petroleum electric products am The voluntary restraints will undergo stern tests in these bargaining Labor groups have expressed disapproval of the 7 ceiling on wage hikes and fringe gains They will acquiesce only if the lid is applied to direct wage increments alone and if living costs are It is too early to rule out for- mal controls on pay rates and BUILDING AND CONSTRUCTION Residential building enjoyed a ban- ner year in Generally available credit-though at costly rates-kept housing starts extremely Added to the need for shelter die- by population pressures was the impetus to home building stemming from the inflation Now that rates have reached levels making home ownership more and tighter bank credit has adversely impacted money private sector for 1978 to some million for In heavy there will be lit- Ue real Government and cor- are under and building costs have risen A sharp is not an- CORPORATE PROFITS DIVIDENDS Business profits recovered from an opening-quarter loss owing principally to the effects of the coal and the balance of 1978 experienced excellent repeat of the past year's outstanding achievement in corporate the restraints on price and the widespread repercussions of 1 he seem- unavoidable OPEC hike in oil Babson's is projecting for 1979 as a whole only a slight in cor- profits after and even this will be the result of the slight paring of federal corporate Income tax- by historical the 1979 profit level will look EMPLOYMENT After three successive years of healthy employment easing con- in a number of large job sources will restrict increment to only token During the recession we expect the number of jobholders could shade off but the frightening rash of layoffs which occurred In late 1974 and early 1975 is not in the cards for there will some gain in the of Jobless workers as well as in the unemployment Tue latter In work its way back up over the 7 mark of the civilian labor Tn to p in The real problem but not enough PERSONAL INCOME With no massive employment dislocations the in personal continue next On the plus side will be the hike in the minimum automatic pay in- creases under existing multi-year labor and fresh pay raises won in 1979 union Income from dividends and interest will post good as will earnings in the Srm even though personal Income will not climb Is rapidly as it has in recent con- will still have a heartening volume of purchasing CONSUMER SPENDING Uneasiness over a less business climate and the specter of labor tie-ups and some job cutbacks will moderate consumers' buying over a good portion of the new There will be a greater emphasis on reducing installment debt and on up This natural- tena to strengthen the economy beyond the months immediately but the short-run impact will be to hold sales and gross dollar volume of trade somewhat bow desired sumer eagerness to buy in the ap- twelve AGRICULTURAL 1978 was another bumper crop year for American with incomes posting a good increase over Many in the agricultural sector T in operating costs and the cost of Prospects do favor additional firming of crop but huge carryovers are deter- rents to any runaway price As for livestock the of the past year will progress further in DOMESTIC POLITICAL SCENE The anti-inflation battle and the related wage-price restraint program of the Carter Administration will com- mand much attention as the new year On Capitol there will be no dearth of Making a big push in the coming ses- sion of Congress will be proponents of a comprehensive National Health In- program as will advocates of increased funding for seeking alter- native fuel and energy sources to- attempts to redress the energy and tax measures by last both of were compromised to the point of multilateral Also for the Administration will be f inflationary federal budget for fiscal FOREIGN AFFAIRS with anxiety-producing stop-and-go peace negotiations bet- Egypt and Israel-still with im- of disagreement at this S The situation in Lebanon has yet to be and the turmoil in Iran has Western After Iran is a of Petroleum it borders 11 strategically located in terms of the shipping lanes for In continued tensions are like- Even in there are deep-rooted conflicts aloi-g with contemporary power-struggle It should be that an accord on the second phase of the strategic arms limitation talks could improve U.S.-Soviet The tightening of credit will not let up for some and the rise in in- terest rates seems destined to persist into winter or even into the spring of Right we look for the prime lending rate of the nation's leading commercial banks to peak around the 12 but a rapid and sharp subsequent turnaround is not We do anticipate the awesome economic disruptions cn over poor showing against stronger foreign cur- and the frightening climb in money rates in 1978 frustrated the stock market's attempt to sustain its up- ward At with the economy seemingly fated to slip into a the 1979 stock market outlook appears discouraging to many Yet Babson's Reports ex- improvements in the status of the dollar and in the nation's balance of trade to revitalize investment senti- And at some the stock market will likely commence to dis- count economic recovery after the So with stocks at verv month and even to their probable profits for the year forward-looking investors will a selection of opportunities in common stocks and convertible Ba j ff ex s the Dow Jones industrial Average in 1979 to hold in the same range as in 1978 But if headway is made toward curbing in- bolstering the dollar and Mm- our trade the could well launch a drive which would carry new With interest rates nearing a peak the bond market should also give a bet ter account of itself in the year In coming investors in need of strengthening their position in fixed- income investments will have ample opportunity to acquire bonds and preferred stocks that provide attractive