Slipping into Gear

By Adam Zagorin/Washington

Few people are knocking at Robert Wescott's door these days to find out who might win the next presidential election. It's still too early for that. But the door knockers will be back. For Wescott, 38, a bespectacled forecaster recently named to a senior staff position on the President's Council of Economic Advisers, is the originator of an uncannily accurate political rule: the incumbent party wins re-election only if Americans' real disposable income grows at 3.7% or better during the 12 months prior to Election Day. Anything below that, and it's curtain time.

Bill Clinton has two more years before Wescott's rule kicks in. Some recent signs suggest that the sputtering recovery might just be starting to hum. Inflation is down to a barely visible 2.5%, and low interest rates are going lower. Last week Morgan Guaranty and Harris Trust and Savings Bank dropped their prime lending rate half a percentage point, to 5.5%. Under Clinton, unemployment has also fallen, from 7% to 6.7%, with the economy generating an average of 152,000 new jobs each month -- roughly twice 1992's pace. Stocks are up to record heights. Investment in plant and equipment is hitting levels not seen since 1984. Auto sales are at their highest since 1989; single-family housing starts are spurting. Says David Hale, chief economist at Kemper Financial Companies: "The U.S. economy appears poised for at least a temporary lift-off."

But what about Wescott's yardstick? Despite the upbeat statistics, real disposable income inched ahead barely 2% over the past year. The ample supply of labor and efforts by companies to trim costs have held down wage and salary increases. "The United States is finally entering a period of sustained, moderate growth fueled by low interest rates," notes Laura D'Andrea Tyson, Clinton's chief economic adviser (and Wescott's new boss). "But we would still like to see higher employment, the creation of more permanent jobs and stronger American exports." Tyson is forecasting modest 3% growth in the inflation-adjusted gross domestic product for the remainder of this year and into next. The question is whether even that pace can be maintained.

Nearly every positive sign of renewed growth turns out to have a negative catch. The good news on unemployment is more than tempered by the alarming persistence of long-term joblessness. "Even reasonably healthy companies are cutting their payrolls," Labor Secretary Robert Reich said recently. "In September, American businesses were slashing jobs at the rate of more than 2,000 a day -- even though profits are rising." As the wave of corporate downsizing continues, some 20% of those unemployed have been out of work at least six months, twice the level of the 1970s. Even low interest rates have a downside: they not only hurt retirees and others living on investment income, but they also encourage millions of Americans to shift out of federally insured bank accounts and certificates of deposit into potentially more lucrative -- and certainly more volatile -- equities and mutual funds. The long predicted -- and long postponed -- stock market correction could hit personal savings hard.

Recent indicators suggest the beginnings of the kind of spending spree that has powered previous recoveries. But will it last? The latest survey by the Conference Board, a business research group, found that Americans' intentions of buying a house, a car or a major appliance were weakening; one-third of those surveyed described business conditions as "bad," and that figure has barely changed since January. Expectant retailers are hoping consumers will be in a Christmas-spending mood to round out an otherwise unspectacular 1993.

Another mixed blessing turns out to be Clinton's $500 billion deficit- reduction package. The measure's passage in August may have cleared the way for further cuts in interest rates, but, in the view of a number of economists, its combination of tax increases on those with the most disposable income and spending cuts could knock between a half and a full percentage point off U.S. growth over the next five years. And so far consumers have no way of knowing whether health-care reform will help or hurt their pocketbooks.

Many of the same economic headaches that contributed to the demise of George Bush continue to nag the Clinton Administration. The biggest migraine is jobs. As with Bush, there may be little the new team can do. Measures that might be tried, like a reprise of the $15 billion White House stimulus package, lack support in Congress and probably wouldn't generate much growth anyhow. For a President whose promises of prosperity won him the White House, an improvement in Americans' spending power is an imperative. Mr. Wescott will be watching.