Comments: Robert A. Brusca
Chief Economist, Ecobest Consulting
How bad will the recession be in terms of its depth, breadth, and duration? Importantly, how does this downturn differ from those in the past, and how will those differences affect how this recession will play out?
According to the formal definitions the recession that began March 2001 will be about average. It will be a bit longer than normal Mar 2001c-Apr 2002 or May 2002 with a peak to trough decline in GDP of about 1%. Of course, the manufacturing downturn has been severe, but as it began well in front of the official start' of the recession, much of its decline does not count' as being in the recession. In terms of breadth there is no real measure, but the NAPM reading has not gotten particuarlly low for a recession (it is a measure of breadth for manufacturing). But the BLS data on employment diffusion show very low diffusion readings telling us the declines in jobs across industries (MFG & Nonfarm) are widespread.
This downturn began as a capital spending recession. It was not preceded by much Fed rate-hiking. There was no pre-recession spike in rates as is often the case prior to recession. Consumption has been well-maintained and income growth has been extraordinary in the downturn (so much so that the NBER recession-dating committee simply ignored it, in order to date the recession). For a time the employment weakness in manufacturing was resisted by the rest of the economy but slower rates of growth for jobs across a widevariety of industries gave a clear signal that weakness was spreading. Still, the NBER claims that it was not until after the events of Sept 11th that the DEPTH criterion for the recession had been met (jobs finally declined yr.-over-yr, for one).
Other recessions had shocks or special events in their middle; they were the longer ones: The 1973-75 recession had an inflation shock in the middle that made the Fed tighten and lengthened the recession. The 1981-82 recession had stubborn inflation that kept rates high and lengthened it. Maturing All --Savers certificates' and Latin American debt problems led the Fed to step away from its monetarist' operating procedures to accomodate that recovery.
This recession has a terrorist attack in the middle of it that will probably make it longer. (1990 had the Gulf War right at' - actually just a bit after - the start). It is not clear that the economy was recovering in Sept. 2001 as the terrorist attacks hit as some argue. Consumer confidnce had just swooned ahead of the attack and the blip up in the NAPM the month before seems to have been a statistical oddity. All of this adds to the uncertainty of what is really going on.
As for uncertainty and crossed opinions: The Wall Street Journal has been running articles on the risk of deflation (four in one week!). Meanwhile, Bundesbank and ECB officals have warned that the US has done too much' and another asset bubble is being risked. I do not recall such a divergence of opinion about a business cycle and I have real time' recollections of 1973-75, 1980, 1981-82 1990-91 and this one
This recession episode is marked by a decline in the some key market indices-- declines of gigantic proportions. Monetary policy has eased very aggressively in this recesssion and early -- it was also early but NOT aggressive in 1990. Plus, the decline in rates is mostly a net decline this tiem around--not a delcline that simply offsets earlier tightenings --real net stimulus. There was a tax cut queued up early in the game (not the right kind' of cut but still it was something). Money supply growth is very strong. The auto makers are doing deep financing discounts as they did in the 1981-recession. It's not clear that these really stimulate demand. But there are actions in train like so many cartoon characters spinning their legs and making clouds of dirt but (so far) not going anywhere.
How are we supposed to balance all these unusual events?
There is very little about this recession that is normal' or conventional. We once again have a synchronized business cycle (the first since 1973-75). We are at war again -a hot war that threatens us at home like we have not been threatened since WWII -- a real homeland threat'. Debt levels are high. We are in a period when WE THINK productivity growth has ratcheted up. But almost no economist has recovery growth rates' forecasted for this cycle that are well above long term growth rates for any quarter in 2002
The US had just come into a golden age of surpluses too big' as far as the eye could seethe opposite myopia of David Stockman's (deficits of $200bln or more as far as the eye could see) but a myopia that was just as severe- more severe. In a flash the surpluses Mr. Greenspan claimed were threatening our prosperity without a tax cut --were simply GONE.. Ever see that happen before? Even after the sudden recession and the events of Setp 11th Congress is as partisan as ever. AS EVER! Yeah, flags everywhere but where it counts.
Oddly the events of Sept 11th have not brought us more political unity at home but have brought us closer together with former international antagonists: notably Pakistan and the USSR. Once again, in a recession, LDC debt problems loom this time in Argentina. We have had a major bankruptcy. One of the world's major economies hasn't clue what to do next to get it out of the morass it has been in for a decade that has become another outright recession. Europe has a policy corset on it that has neutralized European fiscal policy. Japan's fiscal policy is kaput. Only the US apparently has flexibility -- and for using it we are criticized by those in the corset. Go figure
A far as how this recession plays out... Rate cuts will help the economy. But it will take a bit more time due to the terrorist attacks and the lack of a sector to lead us out the consumer has oddly spent himself into oblivion on the auto sector and while that is leading others to be more optimistic about the economy it makes me more pessimistic. These financing incentives TAKE AWAY from 2002-Q2 and 2002-Q3 spending. The layoff annoucements are horrific. They will have ill consequences for consuemer spending. Since neither autos nor housing dived in the recession there is nothing to spring up and give us a vee-shaped' recovery. The recovery will probably look a lot like it did in 1991 when it had no clear demarkation line. It was a bit a of a controversial call as unemployment rose so much and so far during the recovery proper. The quick recovery in the stock market is just too pat. Does it really have the patience for the future the economy faces?
Capital spending has borne the brunt of this slowdown/recession. Can the economy mount any meaningful recovery without a significant pick up in capital spending? What are the influences underlying your outlook for business investment next year?
Capital spending can revive but many parts of this sector are overbuilt. It will be a late contributor to recovery. There is too much unused capacity about to be too optimistic about prospects here.
The Fed has lopped off 450 basis points in 11 months. What are the signs that easier policy is working its way through to the real economy? Is there some structural blockage, or should we just be patient? What kind of headwinds are policymakers up against?
Consumers already have a lot a of debt. Home ownership is at a record high. The stock market drop wiped out a lot of wealth. Layoffs add to the current uncertainly. Despite the sharp drop in rates the outlook for inflation is for it to remain low (or drop!) that takes some of the zing out of lower rates. Firms are still cutting inventory. Capital spending is not even being considered so interest rates are not having a lot of impact. The lower rates did not undermine the dollar. Due to recession and tax cuts it did not help reduce federal debt payments. The drop in rates will work when the economy gets on a more even keel, but for now many special factors impede the impact of lower rates.
Signs of monetary effectiveness are the resiliency in housing and we can chalk up some of the auto financing incentives to the low level of rates that are being passed through. The bond market is a skeptic in all this form the start early in 2001 it has not allowed the Feds rate cuts to shine through to market rates. The Feds own aggresvieness has come back to haunt it through expectations. But TIPS-to-treasuy rate spreads tell us it is not a concern about inflation but confidence in growth.
Copyright 2001, Bloomberg L.P.
