Recession for the Holidays

The official news was late in coming; now, how much longer will the downturn drag on?

John Miller

This article is from the January/February 2002 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2002/0102miller.html

issue 239 cover

This article is from the January/February 2002 issue of Dollars & Sense magazine.

Talk about a lump of coal in your stocking. Late in November, just as the holiday season was taking hold, the National Bureau of Economic Research (NBER)—the nation's official arbiter of the business cycle—declared the economic slowdown that began in March 2001 to be a recession.

In some ways, the NBER declaration was hardly big news. Even before last March, many had already fallen on hard times. During the fall of 2000, economic growth—which had averaged a brisk 5% over the previous year—suddenly slowed to just over 1%. Manufacturing slumped, dot.coms shut their doors, and the stock-market boom fizzled.

In other ways, though, the announcement was surprising. By declaring that the recession began back in March, the NBER confirmed that the economy was well into a downturn before September 11. The economic fallout from the September 11 attacks did cause a faster and deeper drop-off in economic activity, and did help to convince the NBER that the downturn would neither reverse itself quickly nor be so mild as to not qualify as an actual recession. But now it's official: It didn't cause the recession.

In addition, by dating the onset of the recession back to March, the NBER ignored the economist's shorthand definition of a recession: two consecutive quarters of decline in Gross Domestic Product (the broadest single measure of economic output) adjusted for inflation, or real GDP. Real GDP fell in the third quarter of last year and undoubtedly contracted again in the last three months of 2001, but the NBER found a significant decline in economic activity well before then. Both industrial production and real (adjusted for inflation) sales in the manufacturing, wholesale, and retail sectors peaked early in the fall of 2000, and have fallen steadily since then. Once overall employment began to drop after March 2001, as job losses in manufacturing started to outweigh job gains in other sectors of the economy, the downturn was underway.

The official declaration also closed the book on the longest economic expansion in U.S. history, which began in March 1991 and lasted for 120 months. The much-heralded 1990s boom had inspired paeans to the "New Economy" and anointed Federal Reserve Chair Alan Greenspan as "Wizard Deluxe" of economic policy making. Nowadays, we don't hear much about either. The collapse of NASDAQ (the high-tech stock index) and the disappearance of gaggles of dot. com venture capitalists have raised doubts about whether the "New Economy" was authentic. Nor did the bursting of the stock market bubble do much for Greenspan's reputation. Greenspan did issue a 1997 warning about the market's "irrational exuberance." But in an act of colossal neglect, he took no direct action to deflate the bubble; for example, he could have raised the margin requirement (or down payment) for purchasing stock on credit. The current economic contraction, brought on in part by Greenspan's repeated interest rate hikes in the second half of 1999 and the first half of 2000—and so far immune to his now-furious cutting of interest rates—has further exposed the man behind the Fed's curtain.

How long will the recession last? That's hard to say. Since World War II, U.S. recessions have averaged 11 months. As you read this, the economy will already have logged about ten months of contraction. Most financial analysts believe recovery will begin in the first half of 2002. The November 2001 turnaround in the stock market made up the ground lost since September 11, and stronger-than-predicted consumer spending at the start of the holiday season gave cause for optimism too. In fact, a few economic forecasters are already yammering about a shallow recession, no worse than that of 1990-91, soon to be followed by the return of rapid economic growth.

But there are good reasons to believe that this downturn will be neither short nor shallow. Each positive piece of economic news last fall was matched by equally bad economic tidings. Consumer confidence plummeted to an eight-year low as job losses mounted; consumer debt exceeded the levels reached in 1990-91; stock market indicators remained below March 2001 levels; and stocks continued to be overvalued by historical standards, suggesting that a stock market rally is unlikely to be sustained.

There are other indications that this recession will be no better—and could be worse—than the usual postwar fare. First, for the first time since 1974, a recession in the United States has coincided with economic downturns in Europe, Japan, and much of the developing world. Simultaneous slowdowns across the globe will feed on each other, making for a prolonged downturn. For example, the worldwide 1974-75 recession dragged on in the United States for 16 months. Second, unlike every other postwar recession, the current downturn is business-led, not consumer-driven. The bursting of the stock-market bubble, the collapse of the dot.coms, and the decline of the manufacturing sector all contributed to the recession. By September 2000, industrial production had already fallen off by 6%, surpassing the average decline of 4.6% for earlier postwar recessions. The drop in consumer spending, made worse by September 11, came later.

Beyond that, the Fed will be hard put to counteract the downturn. With lingering excess productive capacity across the economy, devastated conditions in manufacturing, and a high-tech sector in disarray, businesses will be reluctant to make new investments even if the Fed cuts interest rates further. Lakshman Achuthan, managing director at the Economic Cycle Research Institute (the New York City-based group that, back in March, said a recession was "no longer avoidable"), points out that the last time business led the way downward was during the Great Depression.

This is not to suggest that a depression is in our immediate future. But, whether an official recovery comes early or later, the economy will continue to sputter. Even the business press is worried that the post-bubble economy will slip into a period of prolonged stagnation. In early November, one Wall Street Journal headline dared to ask, "Is the U.S. Economy At Risk of Emulating Japan's Long Swoon?"

Whether the economy expands or contracts, this much is clear: Working people will be tightening their economic belts for the foreseeable future. Workers did not begin to make significant gains during the 1990s boom until labor markets tightened—well into the second half of the expansion. And even when the current flagging economy begins to recover, unemployment rates will keep climbing—because employers will do little hiring until economic gains are solidified, and the hardest-hit sectors will continue to lay off workers. Should the economic stimulus package currently before Congress be passed into law, it will do more to relieve large corporations of their tax burden than to provide relief for those thrown out of work by the recession.

John Miller is a professor of economics at Wheaton College and a member of the D&S collective.