The White House was on the warpath against the Federal Reserve Board last week. The Los Angeles Times reported on Friday that President Bush was "mad as hell" at Fed Chairman Alan Greenspan because of his refusal to lower interest rates. The report said that Mr. Bush was not likely to reappoint Mr. Greenspan when his term as chairman expires in August 1991.
This development was almost inevitable. Some in the Bush administration started gunning for Mr. Greenspan even before the president took his oath of office. Now, the gloves are coming off in what promises to be a bitter, bare- knuckle fight.The White House appears to have several reasons for trying to ambush Mr. Greenspan. Money is tight, tighter than many investors realize. The economy is hurting. The risk of recession before the midterm elections in November remains high. As administration officials see it, if a slump develops, the the Democrats will increase their already lopsided majorities in Congress. In that case, Mr. Greenspan would lose most of his remaining political support.
Don't be misled by superficial suggestions of economic strength. A variety of factors distorted the report that employment took a big jump in February. Unusually mild winter weather, which reduced weather-related shutdowns, propped up figures for construction, manufacturing, transportation and retailing. There is no evidence of an improvement in the underlying trend.
Rather, the economy simply has borrowed from the future. What appears to be a gain in employment in February will be offset by a decline when employers will have fewer to rehire as the weather improves in March and April.
To understand the economy at present, one needs to step back from a mass of contradictory data. For example, the Bureau of Labor Statistics publishes competing measures of the labor market.
In one version, which counts the number of non-farm payroll jobs, employment looks stronger. By this yardstick, seasonally adjusted nonfarm employment increased by 700,000 in the past two months and by 1.7 million since last June.
By contrast, the bureau's other measure of employment - the household survey - shows that non-farm employment went up only 280,000 since December, and by 550,000 since midyear 1989. The household survey is the basis for the widely reported figures on the labor force, total employment, unemployment and the unemployment rate.
The Bureau of Labor Statistics did not actually count all of the payroll jobs it reported. Rather, the agency simply assumes that new businesses created about 80,000 jobs last month. No one knows whether that assumption was correct.
Bureau statisticians adjust the employment data to take into account normal seasonal variations. The actual job count declined by 1.5 million, or roughly 1.5 percent, from December to February. If the weather had been harsher this year, employment would have dropped more than 2 percentage points.
That's not all. The payroll series showed that employment in "service producing industries" accounted for 98.6 percent of the reported jump of 2.6 million jobs during the year ended February 1990. However, the household survey reported that employment in "service occupations" declined by 258,000 over the past year. The unemployment rate for service workers was 6.8 percent in February, up from 6.3 percent last year.
In a country as diverse as the United States, no one knows for sure which of these contrasting measures provides a better picture. However, reported gains in payroll employment normally exceed changes in total employment at the end of a period of economic expansion. The big increases in payroll jobs in the last few months may not be a sign of economic strength at all. They may represent a warning that the economy is heading for a recession.
Meanwhile, the bureau provided new evidence last week of the slump in corporate profits during 1989. The agency reported that its index of profit per unit of real output in nonfinancial corporations dropped at an annual rate of 39 percent during the fourth quarter of 1989. It was 24 percent lower than the comparable period in 1988.
Mr. Greenspan should take heed of this warning. On nine occasions since World War II, corporate profits declined as much as they have in the past year. In seven of those nine episodes, the economy had either entered, or was about to enter, a recession. The White House has scouting parties out looking for Mr. Greenspan's scalp. In such an environment, the Fed can ill afford to
allow the current slowdown in the economy to get out of control.