Comments: Anthony Chan
Senior Managing Director & Chief Economist, Banc One Investment Advisors
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?
My research reveals that over the last 150 years, recessions are becoming a lot shorter while expansions are getting longer. The periods I looked at included:
Time Period:
Average Length of Expansion
Average Length of Recession
a. 1850 to 1899
27.0 months
23.7 months
b. 1900 to 1949
31.3 months
16.8 months
c. 1950 to 1999
57.7 months
10.6 months
This work suggests that the duration of recessions are becoming shorter over time. I have no reason to believe that this recession will deviate from this long-term trend. In fact, one important difference between this current downturn and other in our recent past is that I cannot find any other recession in the last 50 years that has been met by as much countercyclical firepower as this one has. We have a federal funds rate that now stands at its lowest level in forty years and a Federal government that is finally doing the right thing in terms of spending itself out of bout of economic slowdown. With these forces in place, I have no doubt that the economy will recover by the middle of 2002 baring any other major acts of terrorism on our soil.
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?
I have examined all the (fourteen) capital spending recessions to answer this question (defined as two consecutive quarters of negative growth of capital spending) that we have experienced since 1947. My findings are that we have observed an economic recession in about 65% of these instances. These results strongly suggest that while a capital spending recession is an important contributor towards the onset of a recession, it is not always a sufficient condition for generating an economic recession. Of course, the primary reason that we were able to avoid a recession during the other 35% of instances is that consumer spending was able to offset the negative effects of slower capital spending.
As a result, I believe that the consumer will play a pivotal role in helping us drive the economy out of recession until the pace of capital spending recovers.
However, given that bond issuance this year is running at roughly at a level that is 20% higher than the total issuance for all of last year, I strongly believe that we are amassing a large treasure chest that will be available for future capital spending as soon as our nations corporations become convinced that any economic recovery is sustainable. With a projected economic recovery for the second half of 2002, I firmly believe that although capital spending may not lead the economy out of recession it will certainly follow the lead of the consumer during the latter part of 2002. And even with some small but manageable increases in interest rates next year, rates will remain sufficiently low next year on a relative (historical) basis to make capital spending attractive during a period of rising economic growth.
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?
I hope that after the outsized reaction of consumers to Detroits zero percent financing incentives, that no one will dare say that the Fed is pushing on a string everytime that it lowers short-term interest rates. Our economy unlike that of Japan has proven beyond a reasonable doubt that lower short-term rates do matter. The only real question that remains is how low do they have to go to really jump start the economy without compromising our long-term goals. And given that monetary policy operates with lags between 9 to 12 months, I have no difficulty believing that we have just begun to feel the effects of the initial monetary easings. We still have another 7 or so monetary easings that have already taken place that have not worked themselves throughout our real economy. Once that begins to happen, the economy will come back as if a Marching band was playing in Yankee stadium.
Thus patience will continue to be an important component of the strategy employed by our nations monetary policymakers. Do we have headwinds? Of course, we do. Slower world economic growth and the loss of consumer sentiment after the tragic set of event that transpired on September 11, 2001 are the two most important that come into mind. However, it is precisely due to these factors that the Fed and our Federal government has taken the unprecedented steps to offer more combined stimulus than anything we have seen in the last 50 years! In other words, policymakers have seen the breath of the headwinds and have acted accordingly to offset them. Just like we have not allowed terrrorism to defeat our human spirit, policymakers have also moved quickly to prevent these headwinds from dictating our economic future.
Copyright 2001, Bloomberg L.P.
