The prospect of peace alone won’t be enough to keep the current bull market going. Nor will it restart the U.S. economy, which continues to decline at a rapid clip. Retail sales in January were 1.4 percent lower than the same month a year ago, while industrial production fell for the fourth consecutive month. Some economists see light at the end of the tunnel, but the recession’s end is several months away at best. Says Paul Boltz, economist for the T. Rowe Price mutual funds, “Saddam Hussein may have started it, but rising unemployment and declining personal income are keeping it going.”
A quick end to the war would undoubtedly give a boost to consumer confidence, which is at its lowest level in a decade. Oil prices could drop $2 or more a barrel from the current $20.88, predicts George Benedict, an oil-futures trader with Refco Securities, Inc. But Americans have already enjoyed a 43 percent fall in oil prices since their October peak. The price reductions that lie ahead are small by comparison. They probably will not be enough to trigger a spending boom by consumers worried about keeping their jobs and paying their debts.
President Bush’s Council of Economic Advisers predicted last week that the economy will grow only by 0.9 percent in 1991, even with a quick end to the war. The population has been growing at a slightly faster rate, so income per person is likely to fall for the second year in a row. Despite falling interest rates, business investment won’t pick up until borrowing is even less costly.
Abroad, declining economic growth will keep the export sector from leading a recovery. Exports have been a driving force behind the U.S. economy since 1988 (chart). American farms, factories and mines shipped $394 billion worth of goods abroad in 1990, up from $250 billion in 1987. That heady growth is unlikely to continue. “We have got more of a slowdown than expected, and that is going to have an effect on U.S. exports,” says Stephen Marris, a Paris-based fellow of the Institute for International Economics. At most, projects Bush economic adviser John Taylor, foreign sales will add 0.5 percent to U.S. output this year.
U.S. industry is already feeling the changed climate abroad. “You’ve got to go out and get new customers to grow in 1991,” says Peter Ashton, who runs Timken Co.’s bearings business. “If you just rely on doing in 1991 what you did in 1990, I suspect sales on exports would be down.” A survey last month by the National Association of Business Economists found that one third of exporters had rising foreign sales while one fifth reported declines. Six months earlier, not a single company surveyed reported a drop in exports. “The general industrial markets are being hit,” agrees J. Michael Hagan, president of California-based Furon Co., which exported 17 percent of its $330 million in sales last year. At Allen-Bradley Co., which manufactures electronic controls, senior vice president William Fletcher scoffs at the notion that exports might carry the economy one more year. “I don’t know where people think these exports are going to go, " he says. “The only thing I could see in the next six months might be rebuilding Kuwait.”
The growth slowdown abroad has little to do with the gulf war. Canada, which buys one fifth of all U.S. exports, is burdened by high interest rates and a new 7 percent tax on goods and services that could cripple consumer spending. Germany’s central bank has raised interest rates sharply to rein in a postunification boom; that has forced interest rates up all across Western Europe, putting the damper on growth in France and Italy.
In Britain, where manufacturing output declined 3 percent in the final quarter of 1990, home-mortgage foreclosures are running at a record rate. Sir Alan Walters, onetime economic adviser to former prime minister Margaret Thatcher, warns that only a deep currency devaluation can forestall a 1930s-style depression. In Japan, the second largest U.S. export market, tight monetary policy is biting as well. Last week the government announced that purchases of new machinery plunged 27.9 percent in December, the third largest monthly decline since 1970.
Bad news is relative, of course. Although Germany won’t repeat 1990’s stunning 4.5 percent growth, its economy is expected to expand by a respectable 3 percent. “Any talk of a recession is pretty absurd,” snaps Commerzbank economist Peter Pietsch. Japan’s economy is likely to grow about 3 percent this year. Akihiko Ito, an economist with Yasuda Trust and Banking Co., says demand for U.S.-made computers, aircraft and consumer goods should remain strong. High interest rates in both countries have driven down the dollar, giving U.S. exporters an added boost. A fairly strong performance by developing countries will also help. On balance, says Andrew Britton of London’s Institute of Economic and Social Research, “the U.S. will be aided in its recovery by the growth of demand elsewhere.”
Still, the increase in exports will be too modest to reverse the decline of 700,000 manufacturing jobs over the past year. The United States is going to have to bail itself out of this recession - and that will require more than quiet on the Saudi front.
Exports will rise again in 1991, but not at the pace of recent years.
Real growth in total exports, change from previous year, in billions of 1982 dollars.
