TOPICS > Economy

Crunching the Numbers

May 3, 2002 at 12:00 AM EST


RAY SUAREZ: Making sense of the numbers. The unemployment rate is up, the stock market is down for the year, and yet signs of economic recovery abound. So what should we make of all this conflicting economic news?

We put that question to two long-time economy watchers. Gretchen Morgenson is a financial writer and columnist for the New York Times. And Ed Montgomery is a professor of economics at the University of Maryland. He served as Deputy Labor Secretary in the Clinton Administration.

RAY SUAREZ: Well, Professor, is 3/10 of 1 percent a sizable jump for one month?

EDWARD MONTGOMERY: Well, it is a significant jump and more than I think people were expecting. But I think if we step back, if you remember not more than two months ago, Alan Greenspan predicted that over the course of this recession, the unemployment rate would get up to 6 percent. That’s exactly what we see now. So it is not all a surprise to us, but nonetheless, it was a big jump for one month.

RAY SUAREZ: But there have been a lot of countervailing evidence that things were improving, as well: Improved manufacturing numbers, good durable goods orders– not necessarily last month, but over the last several months — housing starts numbers were good; the weather had been mild. So there might have been an expectation that it wouldn’t have been as big?

EDWARD MONTGOMERY: Well, I think part of what’s going on in the manufacturing picture continues to improve now. While employment and manufacturing fell another 19,000, that’s a much smaller drop than we had been seeing previously in the year, where we were averaging about 100,000 to 150,000 jobs lost each month. So in terms of that, there’s some improvement. The two parts of manufacturing that have been really hard hit– industrial equipment, electrical equipment, production — both were stable last month. So that’s some positive news, although, again, we haven’t seen employment start to climb yet in manufacturing.

RAY SUAREZ: And just to be clear, the economy is making new jobs, isn’t it?


RAY SUAREZ: Just not enough?

EDWARD MONTGOMERY: It is. It actually added 43,000 jobs last year, last month, I’m sorry. In the service sector we added over 100,000 jobs. Health supply was growing, health services were growing; engineering services were growing. So a number of sectors were growing. The economy picked up a little bit. I think the large declines have seemed to have gone away. And so that’s a positive trend, but I would expect to see some softness in the labor market still going out in the next month or two.

RAY SUAREZ: Are there regional hot spots, either places that haven’t been as severely affected, or places that have been hit harder?

EDWARD MONTGOMERY: Well, this is a very traditional recession — much like the 1981 recession where most of the job loss was in manufacturing, in this recession, over 70 percent of the job losses have also occurred in manufacturing. Again, in the rust belt states, those are the states, which have been disproportionately hit this time around.

RAY SUAREZ: So the Great Lakes and–

EDWARD MONTGOMERY: So the Great Lakes — Michigan, Ohio, Illinois, Wisconsin, those kinds of states. Where there’s textile in North Carolina, South Carolina, those states have been severely hit. Unlike the ’91 recession, this really hasn’t been a white collar recession. So we’ve seen growth in finance still. We’ve seen growth in the service sector throughout this recession. So, again, it’s a very traditional recession in the sense that it’s been disproportionately in the manufacturing regions of the country.

RAY SUAREZ: Now, last week came the news, the annualized rate, the Gross Domestic Product, had leapt 5.8 percent. If it moderates that kind of growth, as the federal people who watch these numbers predict it will, will 3.5 percent or so be enough to keep job growth steady enough to sop up some of this new unemployment?

EDWARD MONTGOMERY: Well, if we go back to something like 3 percent, 2.5 percent, 3.5 percent, what we get is a fairly weak recovery. I think it would start adding jobs. It wouldn’t return us to the kinds of days we saw in the late 1990s where the economy was growing at 4 percent, 4.5 percent a year. We were adding 200,000 jobs a month. I don’t think we would necessarily get back to that kind of picture unless we get a substantial pickup in economic growth.

RAY SUAREZ: Now, Gretchen Morgenson, there has been news ample to make the pessimists and the optimists happy over the last couple of weeks. But no matter what happens, it seems, whether it’s good news or bad, the market continues to decline. Why?

GRETCHEN MORGENSON: Well, I think that it’s because the numbers, even if they look good from the top line number, that they’re not really indicating a strong economic recovery. For instance, the 5.8 percent GDP growth in the first quarter was really largely a function of government spending and an increase in inventory buildup at corporations. Now, that’s not a bad thing, but it’s not as good as corporate earnings. Final sales to consumers or customers of these companies, that’s what the market wants to see. And they’re not seeing it yet. Now, as far as the employment figures, the problem with the increase to 6 percent, which was announced today, is that there is a fear that the consumer will be heard, that consumer spending, which has really driven the economy recently, as corporate capital expenditures have declined, that the consumer will start to cut back on the spending, and that will be bad.

RAY SUAREZ: Well, if we’re waiting for corporations to start investing, to really start turning things over, where in the cycle does that typically happen? Do businesses have to see these other numbers trending higher before they jump in and start investing in new plant, new equipment, new employees?

GRETCHEN MORGENSON: The difficult thing about this cycle is that we had such a prolonged boom for so long, and the excesses in certain areas of, say, telecommunications, other technology spending, it might take an extraordinarily long or unusually long period to work out those excesses, to work down the inventories. At the same time, because this is technological goods that we’re worrying about, we do have an issue of these obsolescence in goods, which is a problem for technology concerns. It is a real problem right now, because technology has really driven the capital expenditure part of the cycle, and that is really sort of dead in the water.

RAY SUAREZ: The Dow Jones Industrial Average is down about 15 percent for the year, the NASDAQ even more. Is there still a sense, among people who buy and sell stocks, that they are still too expensive?

GRETCHEN MORGENSON: Yes, definitely. Particularly when you look at the earnings. The markets are still overvalued by many measures. And since investors have had two years of down markets, it’s almost as though they think they’re owed an up market; that nowhere is it written that they have to take three years of pain. But the fact of the matter is, if earnings don’t come back, the stock market is going to really, I don’t know, be lackluster certainly.

RAY SUAREZ: And Professor, how does the stock market fit into other parts of this cycle? Will people feel more confident about their own spending? Will businesses feel more confident about their own spending once people at the top of the corporation see that their own share prices are higher?

EDWARD MONTGOMERY: Well, I think one of the things we have to keep in mind, over the course of the 1990s, there has been a dramatic increase in ownership of stock by average Americans. And so one has to wonder, until share prices start to rise, until workers and the average American starts getting some increase in wealth, whether you’re going to see bigger increases in consumer spending. Consumers have stayed fairly confident during this recession. They’ve propped up the economy. Whether you’ll get big booms until the stock market turns around, I’m suspicious.

RAY SUAREZ: Does low inflation, Gretchen Morgenson, and then outlook for low inflation down the road and no new interest rate increases help in the mix?

GRETCHEN MORGENSON: Well, certainly, low interest rates always help stock prices. Now, the current fear that is gathering some steam is the weakness in the dollar, which could be inflationary over the longer term. If it is allowed to weaken and fall even lower, you could have some inflationary pressures.

RAY SUAREZ: Gretchen Morgenson, Professor Ed Montgomery, thank you both.