1992 Ad

Black Enterprise, Dec, 1992 by Andrew Brimmer

In 1992, United States economic expansion moved at a sloth's pace. The recession had ended but employment, sales and income improved only slightly. There was one benefit: economic stagnation lessened inflation's grip.

The deepening federal budget deficit kept fiscal policy from stimulating the economy greatly. Consequently, monetary policy was the main source of economic expansion and this stimulative posture will probably be maintained through 1993.

The U.S. economy expanded by about 2% in 1992. In the first quarter, gross domestic product adjusted for inflation (real GDP) rose by 2.7%. This was the highest growth rate since fourth quarter 1988. But, expansion slowed through December and real GDP is expected to rise by 2.6% in 1993.

The growth rate achieved and projected over the 1991-1993 period is only 33% to 50% of the level recorded during the first two years of recovery following recessions since World War II. Therefore, excess capacity in industry has remained large.

Consumers provided the growth. For example, from the recession's trough in first quarter 1991 through first quarter 1992, real consumer spending rose by 2.2%. Over the same period of time, real GDP rose by 1.6%. Much of the consumer increase was in durable goods--especially furniture and other purchases related to the demand for new homes.

The housing sector provided a major boost to economic recovery. In 1990, housing starts averaged 1.2 million. In 1991, the level fell to 1 million--a drop of 16%. Housing starts averaged 1.189 million in 1992, and may rise to 1.216 million in 1993, representing gains of 17.1% and 2.3%, respectively.

The strength in home building was stimulated by the drop in mortgage interest rates. Traditionally, housing has led the economy out of recessions, and as mortgage rates fell, sales rose. Residential mortgage rates fell from an average of 10.1% in 1990 to 8.5% in 1992.

New car sales also supported recovery. In 1990, about 9.5 million were sold, but sales fell to 8.4 million in 1991. A slight increase is projected for 1992 and projected sales are 9.6 million for 1993. Most of these expected increases will represent vehicles produced in the United States.

Inflation Trends And Prospects

A favorable effect of slow economic growth has been a sizable moderation in inflation. The Consumer Price Index (CPI) rose by 5.4% in 1990. However, as the recession cut output and unused capacity in manufacturing increased, inflation eased greatly. For 1991, the Producer Price Index for finished goods rose by 2.1% (vs. 5% in 1990). In the current year, the increase may be only 1.4%. However, the pace may quicken to 3.3% in 1993. At the retail level, the CPI may increase by 3.2% in 1992 and by 3.2% in 1993.

With the Federal Government's budget showing such an enormous deficit, fiscal policy has been able to provide little stimulus for economic growth. To prevent the economic slowdown from becoming a very severe recession, the Federal Reserve adopted a stimulative monetary policy in late 1990. The discount rate was cut from 7% in November 1990, to 3.5% in December, 1991, and to 3% last July. Through 1993, interest rates may drop moderately. Look for a federal funds rates of 3.25% by the end of 1992 and a gradual rise to 3.5% in 1993. Thirty-year U.S. Government bonds may average 7.4% and 7.6% at the end of 1992 and 1993, respectively.

Since the 1990-1991 recession, unemployment has risen from 5.4% to 7.8%. During 1992, the civilian labor force grew by roughly 1.4 million while employment increased by 620,000. Consequently, the number of persons without jobs climbed by 771,000 to 9.7 million. While the overall unemployment rate increased from 6.7% in 1991 to about 7.4% in 1992, a small decrease (to 7.1%) is projected for 1993.

In 1993, the economy will not be transformed into a gazelle, but even a sloth can increase its speed.