OCR Text |
Show labson's Forecast for 1900 pireseiratfvffbir 1f 1 BY BABSON'S REPORTS INC., WELLESLEY HILS, MASS. Just a year ago we envisioned in our ecast for 1979 a slowing in the onomic tempo of sufficient scope to eate a technical state of recession, :mming from the effects of anti-:lation anti-:lation monetary measures. We did int out, however, that the intrinsic ength of the economy would forestall ieep, prolonged business dislocation. Instead, we looked for "real" gross na-mal na-mal product to show only enough toning in the second and third arters of the year to constitute a wssion. Visualized was a mild and ief setback, more in the nature of a ell of no growth, with the economy ;ain on the mend by the fourth quarter 1979. The statistical evidence now shows at there was enough resilience to pro-ice pro-ice a sharp rebound in the third arter, negating the spring slump. So, en though 1979's final quarter was iversely impacted by the broader, ore aggressive anti-inflation program stituted by the Federal Reserve, the ar as a whole did not suffer an onomic recession. This was an im-essive im-essive achievement in view of the lights to which interest rates and in-ition in-ition had soared. RECESSION THREAT HEIGHTENED FOR 1980 Developments of the past three mon-s mon-s have raised the odds that 1980 will iperience the economic recession hich 1979 escaped. The Fed's credit-ghtening credit-ghtening move took an increasing tool l business as the final 1979 quarter ogressed. When the results for that :riod are made public, "real" gross itional product (GNP ex inflation) ill probably show some loss. Since we m expect this business barometer to love off further in the initial quarter of )80, the required two consecutive uarters of lower "real" GNP readings ill have been recorded to constitute a session. STEEPER, LONGER RECESSION THAN PREVIOUSLY EXPECTED The staff of Babson's Reports looks, i fact, for the downward slide of Teal" gross national product to extend hrough the second quarter of 1980. The wession, therefore, will very likely ast a bit longer than we had previously mticipated. Also, the depth of the lown-trend is currently expected to ap-iroximate ap-iroximate 4 from the high of the third luarter of 1979. The scope of the reces-non reces-non we now foresee is not unrealistic iince we have experienced only the arly effects of the anti-inflation program pro-gram started last fall. In addition, the fight has been made climtin LfVlCUlt b the further Ann Vu P- for Petroleum products fran allmftatinS of conditions in anvrhtn k SAran aliens are anything butVeassuring f fc petroleum p.cht in or e prices and supplThis does well for the domVic automobile industry in-dustry wh,ch has be in a beleaguered state or many montk and the tfhte ing of credit compo its tro8ubes Extremely high borrog costs and scarcer mortgage mon are h u residential building. Thefore f of these key industries wnbe f . help in 1980. much Fortunately, there 'are nmassive imbalances to correct. Exce excessive supplies of high-V.oline consumption autos relative to rjj de mand, there are no appreciableven tory problems in the economy. Rce" this time around, the perio6,0j economic adjustment is not expected be as vicious as the last recession. Ti first two 1980 quarters will see th. business tempo on the wane, with the first three months likely to bear the brunt of the losses. By the time summer rolls around, the economy should stabilize and perhaps edge a bit upward. The final three 1980 months will make additional headway, with vitality somewhat more evident. But the upturn in the second half of 1980 will not be as power-packed as the rebound re-bound from the last recession because inflation will be difficult to defuse. While the economic recession will not be unduly painful, neither will the ensuing ensu-ing recovery phase be initially vigorous. A GREAT MANY UNCERTAINTIES Make no mistake, there are problems and uncertainties which are capable of inflicting greater damage to the economy than may now seem likely. The uncertain economic climate itself and the questions which are sure to arise in the quadrennial national elec tions, including those concerning anti-American anti-American violence, must be watched closely. More-over, the course of the battle against inflation must be monitored, so it would be ill-advised to project a more optimistic outlook right now. . SLOWER INFLATION PACE POSSIBLE There can be little doubt that inflation has been one of the banes of 1979. While there seems little early prospect of any perceptible remission in the inflation rate, the Babson Staff is of the opinion that some headway can be made against inflation in the year ahead. As the winter progresses, recession-muted demand can help to dampen its fires, and bring additional slowing in the inflationary in-flationary pace further on in 1980. The task will not be easy and the problem will hkely prove stubborn. From this vantage point, we feel that inflation can be wrung down to a rate of around 10 , for the year as a whole. This would still be a higher level than is good for the economy, but the decline would be welcomed. GROSS NATIONAL PRODUCT In current dollars, the nation's gross national product (dollar value of goods u oci vilcs proauceaj will continue ti trend upward. But this will be mainl' due to the impact of inflation, and th( rate of increase will not be as great a; that of 1979. "Real" GNP (the constant dollars GNP - i.e., in terms of the 197: dollar) is now expected to fall about 29? for the year was a whole versus the 197S average. While the exigencies of a political year will likely bring some federal pump-priming moves by spring, nevertheless, never-theless, as indicated earlier, we think vreal" GNP will decline sharply in the Vst 1980 quarter and moderately in the Wing three months. A flat-to-uptilt ern is expected in the third quarter, qui" even better snowing in the final siem Any substantive recovery becaaior to midyear seem unlikely mously f tne tight credit st'll enor-inflatioifh enor-inflatioifh levels of interest rates and VI upward-moving fuel costs. We ookRIAL PRODUCTION trend lower lnduftria I production to good deal "Sh mid:1980- Since recouped ovhe decl'ne, ,wd be year, we feel second half of the dustrial activil annual rate f ln" aboutl below V1" averae only in mind that 9 average. Bern-related Bern-related businesses Product'on Land working downward'? already been of 1979, as has home bhe better Part two sectors should ieng-But these rnvp e late-1980 BUSINESS llNVENi One of the unusual aspect period of economic rise sincene lon8 of 1975 is the orderly manner""' business inventories have beerfn'ch ed mostly in step with the upf nd" sales. Disproportionate inventor! m tions were quickly brought bacH1" line by price-markdown sales ef? This, with the above-mentioned exc tion of hard-to-move gasoline guzzle, in the automobile field, there is no glu of inventories to liquidate. ' Despite the acceleration of infla tion's pace, most inventory position: have been kept trim. This has been dui to the agonizing experience of the lasl recession, the extremely cosuy raies oi borrowed capital over the past two years, the the ability to monitor inventory inven-tory positions closely with the help of computers. But while the economy is not expected to be unduly disrupted by inventory liquidations under duress on a widespread basis, neither will in-(Continued in-(Continued on Page 16) .- -' ' -If1" - . V- V): - r -rut "- W-i u.-" ' . ' .v-f ... .r : , : - v. .. . , .' r'ciu .y." - , V:-' v - - r. , . n.' J GOOD WEATHER has permitted workmen to get the preliminary dozing and ripping work finished this year on the new alignment to the Diamond Mountain road. The $1,390,000 project pro-ject will also include paving 10 miles of road connecting the unpaved section together leading to the Jones Hole National Fish Hatchery. Hat-chery. The project is being funded by the Water and Power Resources Service and built bv Uintah Uin-tah County. The county has hired D.E. Casada Construction Co. to doze the realignment right- urnay. . ' ,. ' " v -- v.-v- ;-. .- .'ff; , j - - 1 . ' v-- ' i . -, .i--;V-v- J A THE THREE MILES of new road start at the turn-off for the Northwest Pipeline compressor station road and ends at the rim of Diamond Mountain. Huge round rocks like the one on the right have been Dlasted from the road right-of-way. The new alignment will eliminate the old switchback route and is located on a south ex- 1 posure instead of the old north exposure road ' Bobson's Forecast - - - (Continued from Page 1) ventory accumulation be an important factor in helping to lift business activity in most of 1980. BUSINESS CAPITAL EXPENDITURES Business capital outlays for new plant and equipment will rise about 10 in current dollars owing to the effects of inflation, but as in the case of the GNP there will be a slight year-to-year slippage in constant dollars. With the ease-off in industrial activity taking the pressure from high-level capacity utilization, incentive to expand will not come until late 1980. LABOR FRONT TO REMAIN ACTIVE 1979 was a busy year in the labor front, and it will be very active again in 1980. However, with most of the major contract expirations coming around midyear i.e., in construction, communications, com-munications, steel, aluminum, and metal containers the early-year recession and the rise in unemployment will temper the aggressiveness of labor leaders. BUILDING AND CONSTRUCTION One of the pivotal industries helping to determine the course of 1980's econuinn; aciiieveiiieiiL win me nuus-ing nuus-ing field. After peaking out in 1978, new housing starts slowed down in the past year. The high degree of inflation-hedge inflation-hedge purchasing of both new and existing ex-isting homes proved to be a substantial bolstering factor for 1979's economy. Nevertheless, high borrowing costs and scarce mortgage credit restrained new housing starts compared with 1978's superlative effort. The tightness in mortgage credit and the high rates for mortgage money may not relent significantly before mid-1980. Hence, we forecast a steep slide in new housing starts in the first quarter of the year, followed by a flat second quarter. After midyear, loosening of the mortgage mor-tgage credit situation and less oppressively op-pressively high mortgage money rates will facilitate improvement in home building; but even then new housing starts will do well to better the . l'i-million mark. Compared to the housing field, heavy construction has fared quite well in 1979, and we expect this relative strength to repeat in 1980. Of help to this sector will be government efforts to bolster a troubled economy and provide employment opportunities for idled workers. CORPORATE PROFITS -DIVIDENDS Corporate profits will dip approximately approx-imately 10 below 1979 levels. The slow tempo of business will deter price markups large enough to offset cost increases. in-creases. The profits pinch will ease in the second half of 1980. And with the less favorable profits picture, we do not expect a wave of dividend increases like ' that in 1979. However, widespread reductions in disbursements are not in the cards. WAGES AND PRICES As indicated earlier, we believe the business decline will have a tempering effect upon the aggressiveness of labor in 1980, and yet bargaining for new labor pacts will produce many wage hikes approximating the Administra-I Administra-I tions' non-inflationary guideline. This ; is unavoidable, in view of the drastic shrinkage of consumers' buying power during the life of the labor contracts about to expire. The early-year softness in business will tend to inhibit the immediate flow-through flow-through of new wage increments in their entirety. Indeed, we would not be surprised to see occasional and spotty price down-shadings. But fuel and energy costs are still heading higher, with an inevitable impact on transportation transpor-tation and distribution costs, and on operating costs in general. Therefore, there will be price rises at the wholesale and retail levels, though not of the magnitude of prevasiveness of recent re-cent years. EMPLOYMENT AND JOBLESSNESS Because the recession we now foresee should not run dangerously deep, 1980 should not experience massive layoffs. Instead, we are confident that employment employ-ment can hover in a peak range, constituting con-stituting a very important source of support for consumer confidence. We do not expect a frightening upsurge up-surge in unemployment. Still, a rise in the jobless rate is inevitable, as it will be difficult for the economy to absorb all of the new entries and re-entries into the labor force. For 1980, we expect unemployment to average about 7'- of the available civilian labor force, with a high point of around 8. PERSONAL INCOME - CONSUMER SPENDING A generally stable employment picture, pic-ture, wage hikes, heavy transfer payments, and interest and dividend incomes in-comes will all figure as favorable factors fac-tors producing high gross personal income in-come in 1980. While the rise will not match the rate of increase established in 1979, our estimate is a jump of around 7. However, take-home pay (disposable personal income) will manage only to edge forward. The sustained peak level of personal income we anticipate will translate into better-maintained consumer spending than seems possible at this time. Though much of the year will be flat, retail trade should end 1980 on a strong note. AGRICULTURAL PROSPECTS 1979 has been a good year for most farmers. Prices for farm products have been strong enough to improve financial finan-cial positions, and this has been another fine crop year. The high level of farm exports should be expanded further in 1980. Shortages in Russia and certain Eastern European countries, plus lagging lagg-ing Canadian output, are favorable to domestic farm exports, With consequent conse-quent benefits to income. DOMESTIC POLITICAL SCENE The campaign for the Presidency will command a good deal of attention in 1980, but it would not materially alter the course of business. The primaries and the election may be bruising, and events such as this nation has had to endure en-dure recently could have an effect on the final outcome at the polls. Charges, counter-charges, and campaign promises pro-mises could influence business and consumer con-sumer sentiment. At the congressional level, the battle for control of both houses will also be tough. However, the Republican party faces a hard uphill fight. It could make notable headway, but fall short of control. GOVERNMENT SPENDING -TAXES Government spending will continue upward in 1980, owing partly to inflation. infla-tion. Economic exigencies will spur outlays at all levels of government to fend off more serious dislocations. Recession troubles will undoubtedly bring pressure for tax-cut legislation. Chances are favorable for tax relief, but that probably will not take effect until 1981. Enactment of a value-added tax is not likely for 1980, and attempts to pare Social Security levies are not likely to bear fruit before midyear. FOREIGN AFFAIRS From time to time, business and investment in-vestment sentiment will be shaken by unrest abroad. The recent appalling anti-American sentiment in many parts of the Moslem world may give other nations na-tions cause to doubt U.S. assistance capabilities. Overall, this scenario, and priorities related to next year's election, do not promise well for worthwhile wor-thwhile progress on important matters such as the Palestinian question and attempts at-tempts to improve U.S. -Soviet relations. rela-tions. Brush fires in one or more of the world's many hot spots cannot be ruled out, but direct U.S. military involvement involve-ment is not likely. MONEY SUPPLIES - INTEREST RATES The emphasis on anti-inflation credit tightening will restrain growth of the nation's money supply. However, economic problems and election-year considerations will very likely force some easing of the throttle on restrictive restric-tive monetary policy around mid-1980. Opressively high interest rates are already showing signs of easing, at least for short-term borrowing. Lower longer-term interest rates, on the other hand, may not come much before the year's midpoint. Overall, we look for distinct betterment in the interest-rates situation by late 1980, but only as compared com-pared with recent peak levels. STOCK AND BOND OUTLOOK While the U.S. dollar will probably be subjected to buffeting from time to time in the year ahead, the reining in of galloping inflation and betterment in the interest-rates picture will be beneficial to the bond market. Therefore, investors who commence to tie down nearpeak interest rates at this time could be well pleased by 1980's end. The strengthening of bond portfolios should initially emphasize issues with near or intermediate maturities before going further out on the maturity scale. Bonds with generous yields are in profusion, pro-fusion, to the benefit of fixed-income investors. in-vestors. These include taxable issues and tax-exempts, medium- and conservative-grade bonds, short- and long-term maturities, and high-coupon and discount bonds. 1979 proved to be another year of frustration for most investors, with the stock market showing little progress. Although some stock groups and merger-bait issues did well at various times, the rest of the market was victimized vic-timized by the unnerving effects of foreign political upheavals, waves of anti-American demonstrations, and the unyielding grip of inflation and high interest in-terest rates. But what was not accomplished in 1979 will benefit investors in 1980 or at least those with the courage, patience, pa-tience, and foresight to ge bargain hunting hun-ting when attractive values abound. Babson's Reports feels the stock market held its own under a number of ordinarily panic-producing circumstances cir-cumstances during much of this past year, and that the year ahead can bring a shift toward more optimism, and longer-term investment planning. There will be oMrtunities for all portfolio port-folio objectives. |