Going Back to Work

By GEORGE J. CHURCH

The jobless rate takes its biggest plunge in 24 years

"Great news!" crowed Ronald Reagan. "Spectacular . . . far greater than almost all previous forecasts," exulted his chief economic adviser, Martin Feldstein. Even Democratic presidential Front Runner Walter Mondale had to concede, "I am pleased, as are all Americans--but . . ."

The figures that prompted these effusions were indeed startlingly cheerful. After six months of disappointingly slow declines from its 42-year peak of 10.8% set last December, the U.S. unemployment rate suddenly plummeted in July. It fell to 9.5% of all those looking for work (not counting members of the armed forces), from an even 10% in June. Not since December 1959, almost a quarter-century earlier, had the rate dropped so much in a single month.

Moreover, as Reagan pointed out during a White House lunch with Hispanic leaders, joblessness "went down in every category, every group you could name." In fact, those people who had experienced the greatest difficulty finding jobs made some of the most striking gains. Feldstein noted that "the number of people out of work for 27 weeks or longer fell by 360,000, or more than 10%." A Labor Department statement added, "This was the first real decline in this very long-term jobless category in two years."

Though still distressingly high, jobless rates for minority groups dropped impressively, from 14% to 12.3% among Hispanics, and from 20.6% to 19.5% among blacks. Even the teen-age unemployment rate, the highest of all, declined from 23.6% to 22.8%. As for the overall total, it is already slightly below the 9.6% average that the Administration's official forecast, prepared by Feldstein, had predicted for the last three months of 1983.

What happened? Some economists suspect a statistical fluke. Says Lester Thurow of M.I.T.: "The drop is too big to be believable." Labor Department statisticians who prepared the report, however, think that if there was an error, it consisted of counting in July some reductions in unemployment that actually occurred in June--which would mean that the drop was less abrupt than it appears, but nonetheless real.

The prevailing opinion among economists is simply that the recovery from last year's recession has finally reached the point at which employers need more hired hands to maintain rising output. Says Richard Peterson, senior vice president of Continental Illinois National Bank in Chicago: "Businesses found themselves having to call workers back into the plant sooner than they thought they would to build up inventories depleted by fantastic sales." In the opinion of Bent Hansen, chairman of the economics department at the University of California's Berkeley campus, employment is belatedly catching up to increases in production that were registered in March and April.

If that interpretation is correct, it would point to further reductions in unemployment at least in the short term, because the recovery seems to be putting on new muscle almost daily. A sampling from last week's news reports: factory orders in June rose 3.9%, the largest one-month increase in three years; retail-store chains in July posted heartening sales increases over a year earlier (9.8% for Sears, 11.8% for K Mart); the Big Three automakers boosted sales in the last ten days of July by 37.1% over the depressed figures of 1982.

Further reductions in joblessness are most certainly needed if the economy is to repair the ravages of last year's recession. As Democrats rushed to point out, even a 9.5% unemployment rate is higher than any that the U.S. suffered between 1941 and 1982. Partly because of high unemployment, the Census Bureau reported last week, the number of Americans living in poverty (now officially defined as an annual cash income of $9,862 or less for a family of four) rose last year to 34.4 million, or 15% of the total U.S. population. That was a full percentage point more than in 1981, and the highest level since 1965, shortly after President Johnson launched his War on Poverty.

The biggest fear is that gargantuan budget deficits will put an end to the upswing after only a further modest drop in unemployment. Says Mondale: "I am deeply worried that the current economic recovery cannot be sustained" in an era of "outsized deficits." Such misgivings are by no means confined to Democrats. Murray Weidenbaum, Feldstein's predecessor as Reagan's chief economic adviser, voices "latent concern" that because of deficits "inflation will hover in the background and future increases in employment will not be significant."

Relatively nonpartisan economists are less concerned about inflation than they are about the threat that a rapid recovery will cause a collision between the borrowing needs of business to finance rising output and the demands of Government for borrowing to cover deficits. This would force up interest rates enough to make the U.S. recovery self-destruct--to say nothing of the baneful effects of high American interest rates, and the concomitant strength of the U.S. dollar, on foreign economies (see ECONOMY & BUSINESS). The speed of the recovery indicated by the latest unemployment figures, says Lawrence Chimerine, chief economist of Chase Econometrics, "puts pressure on the financial markets earlier than expected." One early sign of trouble: new-home sales dropped 2.9% in June, apparently because of higher mortgage interest costs for buyers.

Stock traders obviously are concerned. After going down nearly 50 points in two weeks because of worry about interest rates, the Dow Jones industrial average recovered only a fraction of a point Friday in response to the drop in unemployment, and closed at 1,183. Its 1983 high: 1,248, on June 16. No fretting, however, occurred among Reagan and his aides. "This is a red-letter day in the White House," said Communications Director David Gergen. "Unemployment went down--and Congress is going home." The President joked: "There's one way we can tell our program is beginning to work. They don't call it Reaganomics any more."

--By George J. Church.

Reported by Gisela Bolte/Washington and Marcia Gauger/ New York

With reporting by Gisela Bolte, Marcia Gauger This file is automatically generated by a robot program, so viewer discretion is required.