Many measures of business activity suggest that the recession bottomed
out in the spring and that a modest recovery has been under way since
that time. Despite gradual improvement in the economy, attitudes in
the business community remain extremely negative, far more negative,
in many instances, than seem justified by economic performance. These
attitudes persist even though our country's standing in the world is
high. We have been trying, admittedly without complete success, to understand
the origins of and basis for these attitudes, and our thoughts on this
subject are summarized below.
One straightforward explanation for the negative attitudes prevalent in
the business community is that, while the economy has started to recover,
activity has not yet returned to the pace of the spring of 1990, before the
onset of recession. Indeed, the recession itself was probably a shock to
many, since the preceding expansion was so long-lived that it may have
contributed to expectations of uninterrupted growth. Moreover, in view of the
modest nature of the expansion, previous peaks in business may not be reached
for several quarters. This pattern implies that unemployment is likely to
remain high and profits subdued for some time.
To be sure, a number of policymakers and private analysts suggested all along
that the recovery would be unusually modest by historical standards.
Nevertheless, many business people apparently hoped, and perhaps
expected, that the economy would turn in a more robust performance
and are therefore disappointed by results to date.
The modest pace of the recovery means that corporate restructurings and
layoffs have continued, certainly a highly visible and unsettling feature of
the present landscape. More generally, the bulk of recent evidence clearly
suggests a marked faltering of the expansion. In addition, given the sluggish
state of demand, opportunities to raise prices and improve margins have been
constrained. Pent-up demand for autos and houses, frequently a characteristic
of the first years of recovery, is absent this time, implying mild gains at
best in these two important sectors.
Some businesses, moreover, continue to labor under outsized debt loads
incurred in the 1980s and, in view of the greater prudence demonstrated
recently by lenders, may be encountering difficulty in refinancing their
positions. Related to this is a pronounced decline in real estate values in
some parts of the country. Although not altogether unprecedented, pervasive
weakness in real estate undoubtedly has come as a shock to those who benefited
from the "boom" of the past 10 to 15 years. These sizable, ongoing balance
sheet adjustments are clearly one major source of the deep-seated unease
pervading the economy.
No doubt recent financial scandals and, more importantly, the very real
problems of the thrift and banking industries have undermined confidence to a
degree. And while large federal budget deficits are neither new nor unusual
at this point, the fiscal problems of state and local governments, with both
attendant reductions in services and tax increases, probably were not fully
anticipated. Perhaps more troubling, recent conversations with a wide variety
of business leaders reveal a distinct lack of confidence in government's
especially the national government'sability to efficiently solve problems.
These observations are not offered as a complete explanation for
prevailing attitudes. As suggested at the outset, such an explanation is
lacking as something more fundamental, transcending these comments, appears to
be going on. Its duration and ultimate significance remain to be seen.