"[D]o we have the capability to eliminate booms and busts in economic activity? The answer in my judgment is no, because there is no tool to change human nature. Too often people are prone to recurring bouts of optimism and pessimism..."-- Alan Greenspan
For plenty of industries, the business cycle has been an article of faith. As sure as night follows day, recoveries follow recessions. And certain industries can expect a cyclical bounce in the early stages of a rebound, while others lag behind. But the economy's erratic path lately, and the uneven performance likely in 2003, make such conventional wisdom look ever more dubious. The U.S. today is not only battling terrorism and preparing for war with Iraq but it is also still processing the stimulative effects of go-go Federal Reserve policy, years of productivity gains, and the ongoing shift toward services. As a result, the pattern of recession and recovery across industries has changed fundamentally. "The whole business cycle is different," says Carl Steidtmann, chief economist at Deloitte Research.
How different? Look at the lackluster recovery we're now in--with gross domestic product expected to rise just 2.9% or so annually in both 2002 and 2003. That's about a half-point below the rate thought to be sustainable, and not enough to reverse the growth in unemployment. Traditionally, cyclical industries should have come rumbling back when the recession slipped into history in December, 2001, or so. That would include manufacturing, transportation, and distribution. Instead, these sectors have stumbled, and will probably keep doing so through 2003. But other cyclicals--housing, banking, retailing, and autos--have proven surprisingly healthy and should keep performing, if not quite as robustly. Meanwhile, traditionally noncyclical industries such as telecom are showing signs of new life after a stunning bust.
The big question, which this year's performance may go far toward answering, is whether these recent economic transformations are permanently altering the cycles for various industries. Aggressive Fed policy, the increased role of the volatile tech sector, stiffened global competition, and the ability of the economy to keep growing by cutting costs all are working to strip the cyclicality out of some industries--such as housing and some finance markets, including mortgage and credit-card lending. Yet at the same time, the stock market is marching to its own rhythm. It's no wonder businesspeople in both well-performing and struggling industries are scratching their heads, wondering whether the new patterns are here to stay. "You see increases in productivity in a downturn--a very unlikely situation," says Philip M. Condit, chairman and CEO of Boeing Co. (BA
) "It is enormously different."
Credit the topsy-turvy recovery in part to Alan Greenspan's Fed. The central bank's dozen interest-rate cuts over the past two years have propped up sales of everything from autos to big-screen TVs, as easy credit has kept consumers buying. The magic of 0% financing hasn't translated into profits for hypercompetitive Detroit, to be sure, but it has kept cars moving out of showroom doors at a healthy clip. Retailers and credit-card companies are keeping the spending spree going, despite climbing bankruptcy and credit-card delinquency rates. "Consumer-oriented industries have fared well," says Mark M. Zandi, chief economist at Economy.com Inc., a consulting firm in West Chester, Pa.
Monetary policy alone isn't driving the consumer binge, however. Even as they pile on the red ink in Washington, the Bush Administration's tax cuts and open-wallet policies on defense and homeland security are keeping plenty of cash in motion. The new economic team of the reelection-minded President is expected in January to lay out a $40 billion to $50 billion package of more tax cuts, new incentives for individual savings and investment, and a tax break for business to pump up so-far disappointing capital spending. The optimists in the White House even say lethargic sectors could stir and drive growth up as much as 4% in 2003.
Problem is, such Beltway bullishness hasn't been able to get some key industries--long thought cyclical--off the dime. The slump in manufacturing, for one, predates the recession that began in March, 2001, and is likely to linger. Despite protections engineered by the Bush Administration, shipments by U.S. steelmakers rose a paltry 2% in 2002, and industry analysts say they may contract as much as 1% in 2003. Hard-pressed manufacturers are hoping capital spending by businesses--which shrank for six quarters until the spring of 2002--keeps turning around. But prospects are dicey: A recent Goldman Sachs survey shows capacity utilization is the lowest since the 1982 downturn. That's why CEOs such as Lewis B. Campbell of Providence-based Textron Inc. (TXT
) remain gloomy. Campbell, whose diverse businesses range from aircraft construction to golf equipment, says 2003 "is going to be another tough year. We are not seeing any indications of significant near-term improvement in the general industrial manufacturing environment."
By contrast, builders of new housing can't keep up with demand--and are likely to see only a modest ratcheting down in 2003. The Fed's help, combined with a surge in demand from relatively well-off immigrants and those not affected by rising unemployment, has kept the appetite for housing strong. Sure, stock market declines have made high-end homes less attractive, but moderately priced housing is still hot. "The builders made mistakes," says Anirvan Banerji, director of research at the Economic Cycle Research Institute, a think tank and commercial research firm. "All of a sudden they realized they had been underbuilding like crazy."
Still, for a big share of the economy, cyclicality is just not an issue. Health care will generally stay robust as the population ages. And in a time when war seems likely and security is a growing worry, too, defense contractors can expect some gains in 2003.
The patterns of growth and decline surely will differ this year, as they have in every recovery or downturn. And as more parts of the economy rise and fall with their own unique rhythms, the traditional business cycle increasingly may look, if not dead, at least so 20th century.
By Joseph Weber, with Michael Arndt, in Chicago, Heather Green in New York, and bureau reports
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