Comments: Jim Coons
Chief Economist, Huntington National Bank
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?
The duration of this recession will match the 11-month average. In terms of the peak-to-trough drop in real output, it will be less severe than average. But in terms of lost output (that is, the difference between actual and potential), the 2001-02 recession will be the most severe since 1973-75 (based on CBO calculations of potential GDP and my quarterly real GDP forecasts). At a minimum, it looks likely to at least match the lost output from the 981-82 recession. As has been widely reported, a main difference between this episode and other post-war recessions is that it is investment led. Easy credit and equity and optimisitic earnings assumptions fueled extraordniary capital spending in the late 1990s. This recession is about adjusting high capital stocks to an environment with tigther credit and equity and realistic earnings assumptions. What is different is that the recession will not be complete and recovery cannot take hold until capital and inventory levels have been adjusted through employment and production cutbacks. Interest rate reductions by the Fed and fiscal stimulus form the Treasury can do little to speed these adjustments, meaning sluggish output growth well into next year and a larger output loss.
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?
The economy can start to recover without full participation from capital spending, but the receovery will lack its usual initial surge.
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?
Be patient. I remember when the Fed started raising rates in early 1994, and the consensus was that the tighteneing would slow down the economy by the second half. In fact, the economy kept raging and the Fed had to raise rates throughout the year before the economy finally slowed in 1995. It is the same this time, but in reverse. We should start to see th effects early next year, with one twist. The level of interest rates was probably not a major factor in bringing on the current slowdown. The aggressive reduction in rates this year has kept them in line with the underlying pace of economic activity. Rates were not too high by much as the year began, and they have decreased in sync with the economy. Therefore, we should expect less pop from the reduction in rates than we have seen in pact cycles.
Copyright 2001, Bloomberg L.P.
