ECONOMIC PROSPECTS FOR 1991
The current recession will be mild and relatively short, unless of course, the Gulf crisis erupts. By the second half of 1991, homebuilding and economic growth should be rebounding.
Writing about economic prospects is much more fun when the outlook is bright and cheery. But after seven good years and one rather lean one, the economy's prolonged growth since late 1982 has come to an end: 1991 will mark the first recession year since 1982 and the ninth recession of the postwar period.
Forecasting in the midst of an economic downturn is always a chancy business because the dynamics of a decline are hard to predict. This year, the usual difficulties are exacerbated by a series of events and problems that might convert a mild decline into a severe and prolonged one. The Middle East crisis has weakened consumer and business confidence and eroded real income through its impact on oil prices. Many financial institutions are weaker than at any time since the 1930s, and real estate markets in some areas are being battered in ways that have shaken local residents.
The economy of the United States, nonetheless, still has solid footings, and we believe the current recession will be relatively mild in both depth and duration. By the second half of 1991, economic activity and single-family housing construction are expected to turn up again, albeit with less than the usual vigor that is characteristic of earlier postwar recovery periods.
The case for a mild recession
The case for a mild recession rests on three pillars. The first is that absent a shooting war (and maybe even with one, although that is much less certain), oil prices will come down from the average level prevailing since August 2, 1990, to a range of $20 to $25 a barrel. The loss to world oil supplies of Iraqi and Kuwaiti production since August has largely been offset by the increased output of Saudi Arabia and other countries, so that world demand and supply for crude oil are in reasonably good balance. (Today's oil prices still reflect market fears of a disruption of supplies should a shooting war erupt.) Such a drop in crude oil prices--particularly if accompanied by an end to the Middle East crisis--would have a tonic effect on the economy. Consumer spending power would improve; inflation would abate, and consumer and business confidence would turn up again. The crisis in the Persian Gulf is not the only reason for the current recession, but it is a major contributor. Removing that growth impediment would be of major benefit to our overall economic health.
The second pillar on which the case for a mild recession rests is the state of inventories. On average during previous postwar recessions, roughly half of the decline in real GNP was accounted...