Views Diverge On the Outlook For US Economy

THE nation's economic recovery may be occurring in fits and starts because American consumers and businesses, the engines of economic growth, are shifting gears and going in opposite directions.

While already-low consumer confidence dropped off sharply in July, business confidence rose to an eight-year high, according to a Conference Board poll. The New York-based forecasting group publishes consumer indexes every month and registers the business outlook on a quarterly basis.

Recovery from recession is "a bumpy road," says Jason Bram, a Conference Board economist. He says consumers are concerned about the 7.8 percent unemployment rate and apprehensive about further job losses, but businesses are heartened by better balance sheets that show reduced overhead costs and fewer employees.

The 500 United States business executives polled represent small, medium, and large-sized firms. For the most part, they see no bottom-line improvement in terms of more sales or higher prices. They are streamlining - generating the same output with more efficiency and fewer employees. Their perspectives reflect a sense of relief that the economy is no longer contracting, even if growth during the past five months has been very sluggish.

But no matter how down-sized the firm, robust consumer spending - which makes up two-thirds of overall economic activity - is essential to business vitality.

"We've been through a period in the past several years of debt reduction," US Secretary of the Treasury Nicholas Brady told reporters at a Monitor breakfast last week. Household debt as a percentage of disposable income, "traditionally at 15 percent," rose to 18.5 percent in 1991 and now has dropped to 16.5 percent, he says. "When it went up over its traditional line, it obviously had an [adverse] impact on the economy."

Businesses, too, have improved their debt-to-equity ratios: "There have been substantial additions to the [corporate] equity base," during the past year and a half, Mr. Brady says. "In my view, we're in a great place for the future."

However, almost all of the recent economic statistics indicate a dismal job market and a guarded attitude on the part of consumers.

According to government numbers released Friday, personal income edged down slightly and consumption made barely perceptible gains in June. During the same month, wages and salaries declined and disposable income fell marginally.

Increases were posted in factory orders and new-home sales in June, but the gains were overshadowed by news that the economy grew this past spring at half the speed it did during the first three months of the year.

Few signs point to a marked reduction in June's 7.8 percent unemployment rate, the highest in eight years.

Brady expects the economy to grow by 3 percent during the last six months of the year.

But based on June's steep slide in consumer confidence, the Conference Board projects a very sluggish 1.4 percent growth in gross domestic product for the second half of 1992. "We're lower ... because we don't see any one area to pull the growth rate up," says Mr. Bram.

With the lowest interest rates in 20 years, "it's inevitable" that consumers and businesses will soon start borrowing, says Brady, who told reporters at the Monitor breakfast last week that "everyone is so apprehensive" because presidential candidates "have been saying how lousy things are in order to put the Bush administration and the president in a bad light."

Claiming that the opposite is true, Brady said that "we've been told our workers are idle and less educated, our goods uncompetitive, our managers inefficient, and that we can't compete with the Japanese, the Germans, or anyone else in the world."

Industrial productivity is up, the cost of production is down, and businesses are keeping overhead and inventories low, Brady says.

"The US industrial machine" is changing its "cost structure, which allows us to compete on a worldwide basis.... We have got the American industrial scene set at a level which will produce very solid and important growth in 1993, 1994, and 1995."

That restructuring will help US competitiveness in the long run, economists say, but US workers are bearing the brunt of the transformation. More than 40 percent of businesses polled said that cost reduction - largely attributed to worker layoffs - is their prime source of improved profits.

And an increasing number of US firms are moving their operations, and their jobs, to foreign markets where the cost of overhead is lower and labor is cheaper. That is all part of the cost-reduction trend, says Bram, but with such moves as the recent Smith Corona Corporation decision to transfer its shop to Mexico, "there is a more profound affect on labor markets in the US." The US-Mexico free-trade agreement is part of an effort to create an even-broader market for US goods and services, Brady says, and

"jobs are going to be created based on exports."