Recovery Remains Elusive Despite Wall Street's Surge

Several economists forecast recession will drag on late in year

IS the stock market boom heralding economic recovery soon in the United States? Yes, says Michael Keran, chief economist of Prudential Insurance Company of America. Indeed, he figures the recession will have reached its bottom either last month or this month.

No, says Richard Hokenson, an economist with Donaldson, Lufkin & Jenrette Securities Corporation, a New York-based broerage house. "We don't expect a recovery to start until late this year. The market is dancing to a different drummer."

Mr. Hokenson forecasts a drop in national output of about 3 percent in this downturn, an amount comparable to that in the bad recessions of 1973-75 and 1981-82.

The Dow Jones industrial average broke the 3000 mark Wednesday, before slipping back Thursday and Friday to close at 2965.59. This average of 30 Blue Chip stocks is up more than 600 from a low point in October.

But, says Lacy Hunt, chief economist in the US for HongkongBank Group, "I'm not going to base my forecast on the stock market." Recalling the October 1988 market crash, which was not followed in 1989 by a recession, and the July 1990 peak near 3000, which was followed by a recession, he says the market hasn't been a good indicator for years. "It has been an investor, speculator, and technical market."

Like Hokenson, Mr. Hunt has a gloomy view. "The recession is going to last until late in the year and then the recovery isn't going to be worth much."

Economists, as a group, have been marking down their forecasts as the slump drags on. According to a survey of some 50 forecasters by Blue Chip Economic Indicators (Sedona, Ariz.), the median 1991 forecast for real growth, taken in April, was minus 0.1 percent, down from zero in March.

In view of the severity of job losses in March, many forecasters are likely to shave their estimates of 1991 growth by another 0.2 or 0.3 percentage points, says David Hale, chief economist of Kemper Financial Services Inc.

Reasons for serious slump

Economies abroad have been slowing, too. The Asian Development Bank last week said world output is unlikely to grow by more than 1 to 2 percent this year.

Nonetheless, most economists still would agree with David Wyss of DRI/McGraw-Hill, when he says: "We will be out of recession by mid-year. This is a mild recession."

The case for a more serious slump hangs on such evidence and arguments as these:

The economy has suffered greater job losses since last June than in the first nine months of the previous three recessions. "With employment off as sharply as it has been, we should expect the disappointing trend in real disposable income to continue," notes John Winthrop Wright of Wright Investors' Service, a money management firm in Bridgeport, Conn.

Real disposable income - what consumers have left to spend after taking out inflation and taxes - has declined more in this recession than any other post World War II recession other than the 1973-75 downturn. "Real disposable income is still declining," says Hokenson. It is this lack of income which is depressing spending - "not the Gulf war."

Hokenson also sees weakness in nondefense, nonaircraft capital goods orders. "Domestic capital spending and the export of capital goods has weakened considerably," he says. In recent months, exports have been weakening after deducting inflation. But imports have declined even more. So the trade deficit has shrunk.

'Deleveraging' economy

Hunt worries about the "overleveraged corporate sector." Companies, having piled on debt in the 1980s, are now having to use 48 percent of their earnings to cover interest expenses.

Consumers, too, he says, have borrowed heavily. They are able to save only 4.3 percent of disposable income now, compared with 8.5 percent in the previous three recessions. Banks are also stretched financially. "The economy has to go through a period of de-leveraging," he says.

Other negative factors for the economy are a decline in defense spending and a hike in both federal and state taxes. The National Governors' Association found in its annual survey of state budget conditions that $10.3 billion in new state taxes have been enacted. Overall, state spending will increase just 0.3 percent ahead of inflation in the fiscal year ending June 30 as states strive to trim budget deficits.

Some good news

At the federal level, Hokenson expects the slump to result in a deficit of $350 billion in the fiscal year ending Sept. 30.

On the positive side of the economy, a demographic change - the low birthrate 18 to 22 years ago - means fewer new workers. "It is the smallest increase in the labor force in any postwar recession," says Hokenson. As a result, he expects unemployment, 6.8 percent in March, to peak somewhat under 8 percent. During the last recession, it averaged 9.7 percent in 1982.

Also, inflation is coming down, partly because of the drop in oil prices from their high level during the Gulf conflict. Mr. Keran sees prices picking up to a 4 percent annual rate in the second half of this year from a 2.5 percent in the first quarter. But the increase in prices will fall to 3.5 percent in 1992 and 2.5 percent in 1993, he predicts.

Another hope for recovery stems from the drop in interest rates and the faster growth in the nation's money supply in the past three months. But Mr. Wyss says: "I would feel happier if the Fed were loosening. I am more nervous that the recession will last longer than that inflation heats up."