What has been most surprising in the post-crisis experience is the extraordinary resilience of the U.S. consumer. Household spending, which accounts for more than two-thirds of the U.S. economy, has grown rapidly. Indeed, it has shown little net reaction beyond September. Though the immediate disruptions -- to business, transportation, and everyday life as news-hungry citizens remained glued to their televisions -- clearly depressed spending in September last year, consumption surged in October.
NO DENT IN SPENDING. Amazingly, that increase enabled the net volume of spending in 2001's second half to come in exactly in line with our pre-September 11 forecasts. Third-quarter consumption growth was depressed -- hitting only 1.5% -- compared to our estimate of 3.5%. But the 6% buying jump in the fourth quarter left spending growth in those three months approximately the same 2% above the 3.5% to 4% trend that started a few months earlier, following the 2001 tax cut.
The implication: Spending in the last three weeks of September was simply pushed back to October -- with no net loss. If any households did restrain their spending, this effect was fully offset by others who reacted positively to lower interest rates -- especially for auto loans -- or spent more recklessly in a suddenly uncertain world.
The savings rate did rise from a level of about 2% prior to the attacks, if we account for distortions from tax rebates, to around 3.5% as of January, suggesting that consumers entered 2002 with marginally more cautious spending plans. But the negative effects of this were completely offset by another round of tax cuts starting in 2002. The result was little discernible slowing in consumer spending despite the slightly higher savings rate.
RAMPING UP PRODUCTION. The second important point is that businesses completely underestimated consumer resilience and massively underproduced in the fourth quarter. They have since been forced to address lean inventories through production increases that have consistently outpaced economists' forecasts. The result: A more abrupt-than-expected reversal in GDP growth through 2002's first three quarters to a rate that we now estimate at 3% to 3.5%.
Indeed, the revised 2001 GDP figures revealed a sizable 2.7% gain in the fourth quarter, despite general downward revisions for the rest of the year. That leads to another surprising conclusion: The recovery may have begun in the immediate aftermath of September 11, rather than in early 2002, despite widespread pessimism at the time and lingering weakness in some production indicators.
One less encouraging trend has emerged in the attacks' aftermath: Business uncertainty and pessimism have continued longer than might seem reasonable given the strong GDP trajectory, though corporate investment on equipment is posting a slow but steady acceleration alongside the inventory rebuilding.
CORPORATE DOUBT. This weakness may reflect the downdraft in stock prices in the wake of the accounting scandals -- with their resulting impact on business managers' decisions -- rather than September 11's influence. But we may never be able to untangle the effects of these two crises on business spending.
As it stands, inventory-to-sales ratios, which gauge how much goods producers have chosen to have on hand to meet expected demand, remain remarkably low despite outright inventory liquidation ending by the second quarter. And commercial construction activity is continuing to fall, alongside the recovery under way in equipment spending. So while consumers remain steadfast in the wake of September 11, the jury is still out on how long business' depressed behavior will continue. Englund is chief economist for economic-analysis firm MMS International