The Outlook: Recession-Free 1988? Don't Bet the Ranch
NEW YORK -- Whenever a new year rolls around, the outlook for business invariably receives more than the usual amount of attention. The start of 1988 is no exception. Indeed, the degree of interest seems exceptional even for a new year. This reflects concern that last fall's stock-market crash may have signaled an approaching recession, as well as uneasiness over the extraordinary longevity of the expansion, which reached the five-year mark in November.</br></br>Happily, most forecasters reckon that the economy will keep expanding as 1988 unfolds. But this consensus deserves close scrutiny. It expects only a sluggish advance, with overall business activity rising about 2%. Such a pace would provide a perilously slim cushion in the event of unpleasant surprises. And important considerations point to just such a possibility.</br></br>Primary among these considerations is the cautionary message provided by last October's market crash.</br></br>This century has witnessed only eight earlier declines in the Dow Jones Industrial Average that approximately matched or exceeded the 1987 slide -- from August 25 to October 19, a wrenching 36.1% drop. In seven of the eight previous declines, as recently noted on this page, the economy also slumped, sometimes starting down at roughly the same time as the market and sometimes more than a year later. The sole exception was in World War II when, with the all-out military buildup, the economy kept rising even though share prices fell more than 40%.</br></br>In predicting more recession-free growth as 1988 goes along, most forecasters apparently believe that the recent 36.1% market slide will prove another exception to the century-long record. Perhaps this will be the case, but experience suggests otherwise.