End of the Recesssion?
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RAY SUAREZ: Well, not so long ago, following the September 11th terror attacks and the beginning of a recession, the outlook for the U.S. economy seemed dire. But today’s Gross Domestic Product data, the broadest measure of the economy’s health, show an economy that sizzled in the first quarter of the year.
And suddenly it seems that the downturn that began in March of 2001 may be the mildest in history. We sort through the numbers and their meanings now with: Anne Wenzel, principal partner at Econosystems, an economic and market research firm in California; Mark Vitner, senior economist at Wachovia Securities, the banking company based in North Carolina; and Margaret Simms, an economist for the Joint Center for Political and Economic Studies, a Washington research organization.
Let’s start, guests, with an overview of the number. Anne Wenzel, what does it mean to you?
ANNE WENZEL: I was actually shocked by the large number. I went to bed last night thinking I was going to get up this morning, write about how the U.S. economy was moving sideways. I had been optimistic earlier in the year.
And when I saw that number, I was surprised. Once I looked more closely, I found, though, that final purchases, final domestic purchases actually increased original 2.6 percent, which is a moderate number. There was a lot of inventory investment. And apparently that caused a large jump in the number, along with an increase in residential investment, and, of course, the federal defense purchases.
RAY SUAREZ: So when you say a lot of inventory investment, businesses in the first quarter of this year started building up their stocks again?
ANNE WENZEL: Yes. And that’s actually a good sign. It is a one-time jump in the number. And I really think we’ll go back to moderate growth rate. That 2.6 percent growth in final purchases is probably more indicative of what we’ll see in the following quarter, but it is good. Increase in inventory investment means that businesses think they’re going to be able to sell that in future quarters.
RAY SUAREZ: Mark Vintner, moving side ways or charging ahead?
MARK VITNER: We are certainly improving. The economy is clearly on the mend, the recession is behind us but it’s not quite — the economy is not quite as strong as some people thought it was in January and February. What we think happened is that we had a lot of factors come together in the first quarter, which tended to pull some economic activity into the start of the year, things like the tax refunds which were coming in much larger than expected, lower energy prices and warmer weather, which caused a lot more housing activity to occur in January and February than usual.
And also Easter came in the first quarter. And that really gave spending for non-durable goods a huge boost. They rose better than an 8 percent annual rate. Well, now we’re seeing the payback for that. The quarter ended on a soft note, and we’re likely to see growth fall back a little bit in the second quarter. We are still looking for growth in the second quarter but just not quite at the strong apace as we saw in the first quarter.
RAY SUAREZ: Margaret Simms, an annualized rate of 5.8 percent growth in the mid-of what we are told is a recession is a pretty eye popping number.
MARGARET SIMMS: Well, surely it is an eye-popping number and it can distract us. As the other guests have indicated, this jump is caused in part by businesses looking ahead, expecting sales to pick up.
But there are other places where the economy is still weak, as would be normal even as a recovery undergoes a beginning; for example, unemployment remains high or higher certainly than last year and we don’t expect that that will come down anytime soon.
RAY SUAREZ: Well, we’re barraged, Margaret Simms by numbers that measure various streets and alleys of the economy. One number may be up, another one may be down. What would you want us to look at in assessing the overall health?
MARGARET SIMMS: Well, the NEBR, for example when it calls an end to the recession, won’t look just at GDP, but will look at numbers like employment growth – that is actual job increases, increases in the number of jobs; it will look at income growth and it will look at numbers related to some specific industries like manufacturing. And I think we’ll be a while before we see some of that in a solid way.
RAY SUAREZ: And the NEBR is?
MARGARET SIMMS: That National Bureau of Economic Research. They are the organization that calls official beginnings and ends to recessions.
RAY SUAREZ: What measurements of the economy do you look at, Anne Wenzel, to give us a more nuanced look than the fairly gross GDP figure?
ANNE WENZEL: I’ve been looking primarily at employment. And that’s been going nowhere. Employment is down slightly from December levels. The only area that’s increased is government employment — also some in the lower paid services industries.
And I don’t really think that Americans will feel that a recovery is going on until employment starts to increase again, especially until we see a decrease in the unemployment rate.
What has happened in the first quarter is that output has increased, keeping employment levels stable, so there has been an increase in productivity. And if these increases continue, eventually, as the year goes on, they’ll start hiring again. And I think that that really is what constitutes a recovery — when we get American workers back to work.
RAY SUAREZ: But Mark Vintner, what about the idea of people feeling the recession is over? Was this a pretty black and white recession to the extent that if you had a job, because inflation was low, you were still in pretty good shape? Is that what helped keep spending so strong at the end of last year?
MARK VITNER: We had a lot of things that kept spending strong. I mean, for one thing the tax cuts that we got were perfectly timed. They weren’t planned that way but those tax rebate checks started flowing right when the economy needed them the most and then we had exceptionally low interest rates, which allowed people to refinance their mortgages at lower rates, freed up a lot of income. And we also got the break on energy prices, which put more money in people’s pockets.
So there were a lot of factors that came together that lessened the blow from the recession for people who didn’t lose their job. But more than two million people did lose their jobs. And for them, the recession is not over yet. What we have to see is that we have to get those gains in productivity. We did get very strong gains in productivity in the first quarter, at least it looks like we have. Once that happens, profit margins will begin to improve and companies will feel more comfortable about hiring more workers.
For most consumers, and for many businesses, I don’t think they’re going to feel that the recession is over until we get into the second half of this year. By then we’ll see some more stronger GDP numbers from a fundamental basis, not just improvement on inventories like we saw in this one.
RAY SUAREZ: If you lost your job in the last couple of quarters, Margaret Simms, where are you well placed both geographically and whether you’re in manufacturing or services, where are you well placed as far as what you do for a living to benefit in the coming months?
MARGARET SIMMS: Well, as in any recovery, those with the higher skills tend to get their jobs back first. So we would expect that those at the end of the queue will not get picked up until later in the recovery.
There is some recovery in the tourism and travel industry, and that’s good news, hopefully, for people who felt the biggest brunt from September 11, people in hotel and travel and tourist-related industries.
But generally speaking, it will be those with good skills, with adaptable skills, who will be able to move into the jobs that will recover more quickly.
RAY SUAREZ: Now, it was said that low-wage workers were among the last to be able to take advantage of the long boom of the 1990s. Will they also be the last to feel the recovery?
MARGARET SIMMS: Well, that would be expected. And not just during the 1990s, but in previous recessions it’s low wage and low skilled workers who have been at the back of the line.
RAY SUAREZ: Anne Wenzel, what does the business cycle look like from California? Will California recover as the nation will, or is it on a different timetable?
ANNE WENZEL: Well California is actually experiencing it differently in southern California versus northern California. Apparently in this recession, southern California is doing much better.
Back in the early 90s, they had a lot of base closures and they’re doing much better than northern California that’s been hit. The IT sector here in Silicon Valley is still being hit. There are a lot of start-ups in the area that are running out of funding. They will be running out within the next year or so. And a half to three quarters of them probably won’t receive anymore funding.
And they’re either going to have to grow more slowly or most likely a lot of them are going to die. So unemployment is going to be an issue here in Silicon Valley for at least another six months, if not a year.
RAY SUAREZ: It was said that when downsizing of the military, base closures, the shrinking of the Department of Defense overall came, California was one of the places hit hardest in the country.
Now that we’re in a war, now that defense spending is up, will this help either California or discreet regions of the nation more than it helps the overall American economy?
ANNE WENZEL: It will help defense companies. There was a large contract awarded here in the valley. What happened with the ’91 recession is that there was a lot of merging of companies. So there are fewer defense companies left.
But they will benefit. IT security, too, will benefit. There are little pockets that will benefit from the increase in security and also defense expenditures. But the valley overall is concentrated primarily on computers, networking equipment and software. Some of them are benefiting from the switch to security. But overall, it is still a soft environment here.
RAY SUAREZ: And, Mark Vitner, back to the other coast. How is New York doing?
MARK VITNER: New York is doing a little bit better. New York lost more jobs than any other metro area in the country during the recession. And it seems to be leveling off or seeing some gains in the travel and tourism industry coming back a little bit. The airlines have called back some of their workers.
The financial industry is pretty slow right now. There’s not a whole lot of growth in there. We are not seeing a whole lot of job losses, either. Business is coming back. We’re beginning to see the IPO business come back a little bit. So it is doing a little bit better.
When you get away from New York, the Northeast looks pretty good. It held up in the recession very, very well. The South was hit very hard, though. Manufacturing counts for a much larger share of the South’s work force, particularly textiles and apparel. I believe textiles and apparel accounted for 45 percent of all the job loss in the manufacturing sector. The good news is that textile and apparel are beginning to recover. Textile output grew at a 15 percent annual rate the first quarter, the strongest growth in two years. Apparel output was up 10 percent. And the furniture industry is coming back a little bit.
Down in Florida, Disney World is beginning to hire some temporary staff for the summer. We are also seeing that the tourism and convention business is coming back in South Florida. By and large, Florida would have missed the recession if it wasn’t for 9/11 but the cutbacks in tourism really hit the state hard toward the tail end of last year.
RAY SUAREZ: And, finally Margaret Simms, does the news itself or a growing consensus that the worst may be over become a factor itself in people’s individual behavior, in the willingness of businesses to spend, and the willingness of consumers to spend?
MARGARET SIMMS: Well, I think it does, in one sense, because once consumers have confidence that the economy is on the right road, they’ll be more likely to spend. But they didn’t stop spending as much as was expected in the recessionary period.
So there may not be anything for them left to buy, so to speak. They went out and bought new vehicles with 0 percent financing. So they’ve gotten some purchases in that they might have normally done in the front end of a recovery because that’s usually what people do. They hunker down and then when times look good, they go out and buy those deferred purchases like automobiles and housing.
But some of that held up in the fourth quarter and the first quarter of this year as was indicated. So that is not going to give us the– quite the boost that we thought it would.