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Show Babson's Business and Financial Forecast for 1982 By Babson's Reports Inc., Wellesley , Hills, MA., Dec. 31, 1981. Economic conditions and the status . of public sentiment in the closing weeks of 1981 stand in stark contrast to those , of late 1980. A year ago, overall , business was still trending upward. , .' Moreover, there was hopeful expectancy ex-pectancy that the change in the nation's leadership would lead to an alleviation and ultimately a resolution of problems which had been gnawing at the core of the economy. Now, as 1981 give way to 1982, the economy is gripped by a recession and there is a rising tide of anxiety that the Reagan prescription will produce further harsh dislocation. DEEP PESSIMISM NOT WARRANTED The staff of Babson's Reports feels it is premature to summarily dismiss the Reagan Administration's efforts to shore up the foundation of the economy. It must be remembered that not all of the provisions of the Economic Recovery Tax Act of 1981 are yet in effect. In addition, pessimism with respect to fundamental and long-term considerations is not justified when one gives due weight to the fact that at least some progress has already been made in slowing inflation and lowering interest in-terest rates. Yet much more improvement must be attained on both fronts before their dangers are genuinely subdued, and this is a task which undoubtedly will take a good deal of time and dogged persistence to accomplish. The backlash on both counts in 1980 attests to the absurdity of band-aid type solutions. The true severity of the current ! recession can also be better evaluated ;by taking into account postponement of business capital equipment in- vestment as soon as it became evident : that the benefits of liberalized ; depreciation under the tax legislation ; would not commence until Jan. 1, 1982. During the hiatus, this important element of industrial activity has been kept on a subpar basis. Hence, it is only reasonable to assume that we shall have some catch-. catch-. up buying as 1982 progresses. Of ' course, the high level of interest rates - also served to stifle business equipment - demand, but these promise to be a less ! inhibiting factor in the yeaf ahead. ; Indeed, interest rates have already ; worked down to levels that are appreciably ap-preciably less prohibitive to borrowers. 1982 FROM RECESSION TO EXPANSION Judging from the behavior of various key economic indicators, the last quarter of 1981 will prove to be the low point for the year's business per- ; formance. After an unexpectedly ' vigorous advance in the first three ' months, the economy softened a bit f during the ensuing two quarters and T then slumped sharply to close out the ; year immersed in a genuine recession, r Thus, we have slipped into recession i twice in consecutive years. Yet, unlike 1980's credit-restraint-! fostered economic drop, which began 1 and ended within that year, the r recession of 1981 will likely carry over into early 1982. Even so, due to the : severity of the nosedive during the past j three months and given the decline in : interest rates, there may be only a downward shading of economic activity ' during the first 1982 quarter, followed ' by a flat performance in the spring weeks. This scenario may not be impressive, but it is far less disheartening than the pessimistic predictions which have prevailed of late. Moreover, scattered signs of improvement should be emerging before long, though perhaps not in sufficient quantity and intensity to spell large-scale overall business gains. Around midyear, however, the economy should be moving ahead in concert, and we expect the final half of 1982 to feature distinct upside progress even though the summer weeks may be more robust than the fall season. By autumn new growth in demand for credit may begin to take hold. This should make for some braking influence, in-fluence, though not enough to prevent a definite business uptrend for the year's final two quarters. MORE SOBER EXPECTATIONS Early months of 1981 were filled with mounting anticipation that the new national leadership would revitalize the economy and restore some luster to America's role in international affairs. However, the actual scope and magnitude of the nation's problems have brought home to the public the fact that there are no easy solutions. Nevertheless, this does not mean that no progress will be made. As the Initial public ebullience when the Reagan Administration took office was probably unduly optimistic, so also the current swing to disillusionment is undoubtedly excessive and somewhat myopic. No doubt there will be more give and take between the White House and Congress in 1982. Out of this may come some combination of additional spending cuts, deferral and down-sizing of selected outlays, and the raising of fresh revenues. If our expectation that the bulk of the recession occurred In the fourth quarter of 1981 turns out to be true, estimates of federal budget deficits In this and succeeding fiscal years may prove to be unrealistically high. Also, in view of the steepness of the recession, we would not be surprised to see some of the critics of the tax cuts shift position again and press for the second phase of the tax reduction for individuals to be moved up from mid-1982 mid-1982 to some point earlier-4n the year. HELP FROM ECONOMIC TAX RECOVERY ACT OF 1981 The recent damaging revelation by Budget Director David Stockman that he doubts the viability of the Administration's Ad-ministration's economic and fiscal proposals provided additional fuel for the arguments of opponents as the economy slid into recession. However, the potential benefits of the Economic Recovery Tax Act of 1981 have not been given adequate credit. When all of the provisions of the legislation are fully operative, these benefits should stimulate the economy. Later, their cumulative effect may have an even more positive influence. Taken individually, the tax benefits are far from large, but their collective impact on private capital formation-over formation-over a period of time will be quite positive and widespread. These incentives for individual savings will help replenish private capital reservoirs: The tax exemption on income from the dividend reinvestment rein-vestment plans of qualified utility companies and the broader concept of Individual Retirement Accounts (IRA) even though both these devices have annual limitations. Also, cash flow of corporations will be enhanced by the lower tax rates on profits and more liberal depreciation schedules for capital investments. The latter should spur the modernizations of U.S. productive facilities, make us more cost-competitive in foreign markets without compromising quality. GROSS NATIONAL PRODUCT Despite the sharp slump in the fourth 1981 quarter, real gross national product (the aggregate value in 1972 dollars of goods and services produced) registered quarter-to-quarter changes averaging about 4 percent of a seasonally adjusted annual basis. This was due to the astounding 8.6 percent upspurt in the initial quarter. Although the range of quarterly changes in 1982 will not be as wide as in 1981, and the generally flat first half will not contribute much uplift to the economy to begin with, strength in the final two quarters can make for about a 2 percent average rate of advance in real GNP for the year. INDUSTRIAL PRODUCTION Monthly figures on the physical volume of industrial production early in 1982 are not likely to be impressive. The abrupt business slump has shaken confidence, and it will take some time for optimism to return. However, industrial in-dustrial output should trend upward in the spring and thereafter. With basic industries already so deeply depressed, further improvement in monetary conditions could revive the housing, auto, and consumer durables markets more rapidly than now seems possible. This would add to the strength that has been maintained in the fuel and energy-related energy-related fields. Military business should be a primary source of vitality too. BUSINESS INVENTORIES Heavy inventories of autos, trucks,-and trucks,-and farm equipment are the primary trouble areas right now, with suppliers to these industries forced to curtail output because of soft demand. Elsewhere, however, there should be early need for inventory accumulation in anticipation of a quickening business tempo as 1982 progresses. BUSINESS CAPITAL OUTLAYS Although low rates of capacity utilization and listless business early in 1982 will trend to restrain capital equipment demand, purchases that were deferred in 1981 pending the more liberal depreciation rules of 1982 will have some bolstering effect. We confidently con-fidently expect this important source of economic vitality to become more of a factor as the tempo of business picks up. Moreover, capital outlays will be an important component of the business uptrend going into 1983 as well. INTEREST RATES-MONEY RATES-MONEY SUPPLIES Short-term interest rates have retreated from their peak earlier in 1981. Softening business eased borrowings, causing interest rates to slide downward. Though the bulk of the downturn has already occurred, short-term short-term interest rates could shade a little lower to around 14 percent for the prime lending rate of major commercial com-mercial banks in the early part of 1982 before bottoming out. When the anticipated business upturn is well under way, however, interest rates will undoubtedly be marked up. But enhanced cash flow for businesses, as a result of lower corporate Income taxes and accelerated depreciation allowances, should prevent a quick return to oppressively high rates. Hence, money and credit availability; should be adequate for businesses and consumers in the year ahead, though far from abundant. After backing down a little from peak levels, long-term Interest rates firmed recently In reflection of heavy Treasury and corporate financings. Pent-up demand for long-term funds will not permit more than Irregular downward shadings for a while, but easing of inflation is helping to keep long-term rates from rising. The average increase in the Consumer Con-sumer Price Index for full-year 1981 was probably a shade below 9 percent on an annual rate basis. We look for further easing in the inflation pace during much of the winter and spring of 1982 but firm-to-higher tendencies should rule thereafter. For the full year we expect an average increase of 8 percent. Prices generally should be little changed for primary commodities well into 1982, reflecting abundant supplies and slack demand. However, prices at the point of consumption will be moderately higher owing to labor and transportation cost increases. Expect some primary industrial commodity quotes to rebound when demand quickens. BUILDING New housing starts are expected to rule modestly higher in the year ahead compared with 1981. While our estimates are only 1.3 million units as compared with 1.1 million, a substantially sub-stantially stronger showing than that is unlikely. Though somewhat better situated at present, both mortgage interest rates and mortgage money supplies must improve quite a good deal before building activity can materially surpass our expectation. INCOME Despite spreading work force cutbacks cut-backs in recent months, employment remains in a historically high range. While further small-scale furloughs are likely this winter, employment should recover thereafter. The unemployment picture is less reassuring. It will be nip and tuck as to whether the jobless rate can be kept from a double-digit high sometime this winter. For the record, however, we are hopeful that the jobless pool will not surpass 9 percent of the civilian labor force before easing in response to a quickening business pace. The unemployment rate will average around 8 percent for 1982 as a whole, only marginally below that of 1981. Yet the problem of a sizeable hard core .of jobless workers will remain a critical issue. Personal income will trend higher in the year ahead. However, only an upward bias will be seen during much of the first half because layoffs will partially offset wage increases. When Wrings resume, the income advance will be more noticeable. The climb of ' disposable income (take-home pay) will be accentuated after midyear by another stepdown in federal personal income tax rates. The Social Security tax rate will be higher next year but the income tax reduction will leave nyst consumers with more to spend. Though 1982 will be a big year for major contract renewals, the odds are against long and disruptive tie-ups in the pattern-setting basic industries. Like it or not, labor leaders are finding that they must tread softly in enterprises en-terprises beleaguered by foreign competition and where work forces have been trimmed. However, once the economy regains its forward momentum, labor's stance can be expected to stiffen. CONSUMER AND GOVERNMENT SPENDING Though early, 1982 retail trade will be dampened by uneasiness over business and employment prospects, consumer sentiment will eventually respond favorably to the betterment in a disposable income that will result from recovery in employment and a further reduction in federal income tax rates. Hence, consumer buying can be expected to top that of 1981 by a comfortable com-fortable margin, with the third and fourth 1982 quarters chalking up the best gains. The economy will also benefit from higher government expenditures. ex-penditures. After midyear, for example, defense outlays will be noticeably on the upbeat. CORPORATE PROFITS- DIVIDENDS Business profits in 1982 will be up compared with 1981. During the past year corporate earnings were adversely ad-versely affected by the deterioration in the tempo of business. There should be better profits showings virtually throughout 1982, and on progressively improved year-to-year comparisons with each passing quarter. The reduction in the corporate profits tax rate will be an important factor in increases at the "bottom line." Though brighter prospects for corporate cor-porate profits augur well for increases in dividend rates in 1982, hikes in payouts will tend to be of moderate size in most instances. Corporate liquidity needs to be reinforced and this will take time. AGRICULTURAL OUTLOOK It is difficult to make a case for any substantial betterment for the beleaguered agricultural segment of the economy in 1982. There are gluts in supplies of major products that militate against any large-scale boosts in farm prices. Unless adverse weather patterns pat-terns over large sections of the nation's growing areas threaten a significant alternation of supply-demand balances at crucial points in the crop year, farm quotes will not improve appreciably. Therefore, no substantial recovery in overall farm income appears to be in the cards for 1982. It is likely, however, that exports of agricultural products will top 1981 shipments. FOREIGN AFFAIRS Current prospects do not indicate that any major breakthrough is in the, offing with respect to the resolution of critical international problems. So it appears that 1982 will see more talk than genuine progress on issues involving in-volving the Middle East and Central America. The same is true with regard to Soviet-American relations, particularly par-ticularly negotiations over strategic arms limitation and U.S. and Soviet military involvement in Europe. STOCK AND BOND OUTLOOK Except for takeover situations, 1981 was not a banner year for the stock market. After an early upthrust, stock prices again fell victim to unacceptably high interest rates and worries over the size of the federal budget deficit. Late months of the years saw some gradual revival of optimism, although investors' in-vestors' moves frequently mirrored their uncertainty. Nevertheless, there was some response to the large supply of undervalued un-dervalued stocks and to the favorable implications of lower interest rates. To some extent, the stock market was also discounting the business upturn that was still several months distant. Allowing for spells of uneasiness, we feel that 1982 will be more beneficial to investors. With so many important industries long depressed, and with the Administration encouraging the upgrading of productive facilities, the projected uptrend in business may well generate more momentum than now seems possible. Stocks in virtually all categories and quality are trading at exceedingly reasonable multiples of normal profitability and historical prices. So it vis not difficult to visualize a burgeoning of investment interest. For the record, we forecast that the Dow Jones industrial in-dustrial average will fluctuate within a range of 1100 on the upside and 800 on the downside of 1982. Although the bond market has already scored encouraging gains in recent months, nominal further upside progress can be expected early in the new year. The almond is a member mem-ber of the same family as the apple, peach and cherry. It developed into a nut instead of a fruit. ... At some time its pit was found to be good to eat. |