End of the Recession?

March 1, 2002 at 12:00 AM EDT


MARGARET WARNER: There were signs this week that the lagging U.S. economy may already be on the rebound. That was certainly the message Wednesday from Federal Reserve Chairman Alan Greenspan in testimony on Capitol Hill.

ALAN GREENSPAN: Despite the disruptions engendered by the terrorist attacks of September 11th, the typical dynamics of the business cycle have reemerged and are prompting a firming in economic activity.

MARGARET WARNER: Greenspan predicted that the U.S. Economy will grow 2 ½ to 3 percent this year, that inflation will remain low at about 1.5 percent, and that the current 5.6 unemployment rate will rise to 6 or 6 ¼ later this year.

If he’s right, the recession, which officially began last March, would be the mildest in U.S. history, but, Greenspan cautioned, the recovery would be more subdued as well.

ALAN GREENSPAN: An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery.

MARGARET WARNER: Economic reports since Greenspan’s testimony seemed to bear out his analysis. On Wednesday the government said orders for big-ticket durable goods, like vehicles and appliances, rose 2.6 percent in January, the third monthly increase in a row.

Yesterday the government said the economy grew 1.4 percent in the final three months of last year, far more than the .2 percent originally estimated. And today, as we reported, there were more upbeat reports in manufacturing, consumer spending, and construction. Stocks responded strongly to the news the Dow Jones Industrial Average closed at its highest level today in more than six months.

Does all this mean the recession is over?

Joining me now to explore that are Allan Meltzer, professor of political economy at Carnegie Mellon University; he served on the Council of Economic Advisers in the Reagan Administration. Edward Montgomery, professor of economics at the University of Maryland. He was chief economist and deputy secretary at the Department of Labor in the Clinton Administration. And Bob Walberg, chief equity analyst at Briefing.com, an online research and analysis firm.

Welcome, gentlemen. So, Bob Walberg, is the recession over?

BOB WALBERG: Well, Margaret, I think so. I think we’ve seen the end of the recession. I think this has already been evidenced in a number of the series of data that have come out in the last few months. Consumer spending has been strong. We’ve seen housing stand strong, retail sales strong, and now we’re finally seeing the recovery in the manufacturing sector, I think. As the manufacturing sector continues to rebound, you’re going to see modest but sustainable growth in the economy going forward.

MARGARET WARNER: Allan Meltzer, do you agree that the recession is over? And also, if we’ve only had one quarter of negative growth, was it even a recession?

ALLAN MELTZER: It may not be by the time they get around to revising the record books. I think they were premature when they dated the recession at the National Bureau of Economic Research, and I believe that it doesn’t have many of the characteristics of the standard recession.

The standard recession, as you say, usually has two quarters of negative growth, but it also is generally described as where the pattern of weakness in the economy is widespread. This time we’ve had weakness in investment, and sharp cuts in inventories, but we haven’t seen it in consumer spending and certainly not in government spending.

MARGARET WARNER: Mr. Montgomery, Alan Greenspan, though, did say that unemployment will not only continue, but will continue to rise. Does that mean the recession isn’t over for everyone?

EDWARD MONTGOMERY: I think that’s true. For the average worker, you’ll see unemployment still rising. They’ll still feel the effects. Even last month, when the unemployment dropped, that was because the labor force fell by a million workers. And if you took that out, the rate already would be 6.2 percent, and I would expect it would continue to rise for another two or three months.

MARGARET WARNER: Mr. Walberg, now let’s go to the second part of what Alan Greenspan had to say, which is that the recovery will also be unusually mild. That wasn’t his word, but will be slow, will be subdued. Why is that?

BOB WALBERG: Well, I think that’s probably focusing on the fact that this is investment remains week, and that was obviously the driver of the economic downturn. Until we see corporate profitability return, we’re unlikely to see a big spike in business investment.

And since corporate profits aren’t expected to start recovering until about the second half of this year, I think there is some concern that this economic recovery will be somewhat modest, at least in its origins.

MARGARET WARNER: But put that in layman’s terms; what does that mean when you say the business sector is… the business investment hasn’t picked up? What aren’t they investing in? What is really happening there?

BOB WALBERG: The companies right now aren’t investing in new plant and equipment, they’re not investing in new computers, they aren’t making big investments that they were making a few years ago when we saw business investments surge due to, you know, concerns over y2k, and the growth of the Internet. We saw a lot of new computer being purchased, new networking equipment. A lot of those companies bought that stuff and now, with relatively new products, don’t need to be doing it again.

And so, consequently, there’s very little demand on the business side for new computers and new technologies. And also, because of a sluggish economy, there hasn’t been a big growth in demand for new plants or equipment. So until demands picks up, you’re unlikely to see a big spike in business investment.

MARGARET WARNER: What would you add to that, Mr. Meltzer, in terms of why… first of all, do you agree that the recovery will be not terribly robust, at least at the beginning, and, if so, why?

ALLAN MELTZER: No, I don’t agree that the economy will be especially weak at the beginning. We’ve had an enormous, rapid correction in inventories. I can’t remember when inventory adjustment was so large and so quick. If we just stop cutting inventories, we are going to add about 1.25 percent to GDP growth just in stopping…

MARGARET WARNER: Let me… let me interrupt you there. Now, explain what you mean by that, about inventories.

ALLAN MELTZER: Inventories.

MARGARET WARNER: In layman’s terms.

ALLAN MELTZER: Sure. In layman’s terms: Companies, wholesalers, whole stocks of goods on sale to be sold to consumers and other businesses; when recession comes, they reduce their holdings of those stocks because they don’t expect good sales.

Now, in the fourth quarter, they were very, very much reduced. They cut to the bone the holdings of goods for future delivery. They’re going to have to replace those because consumer sales have been going along very well. That alone will add quite a bit to the start — to give momentum to the start of the recovery.

I agree that it is almost universally true that small downturns generate small upturns, and so this upturn may be weak for that reason, but I don’t believe that it is going to be particularly weak. And Greenspan’s number was that we would be at trend rate of growth by the end of the year.

MARGARET WARNER: What’s trend rate of growth?

ALLAN MELTZER: Trend rate of growth is about 3 to 3.5 percent.

MARGARET WARNER: Mr. Montgomery, your predictions about the strength and robustness of the economy?

EDWARD MONTGOMERY: I guess I would agree more with Mr. Walberg. I’m concerned that we had lots of investments in IT and…

MARGARET WARNER: Information technology.

EDWARD MONTGOMERY: Information technology and new computers in the late ’90s. I think there’s an overhang for that. That gave us lots of our growth in the ’90s, and I would be concerned how quickly businesses are going to go back to that kind of spending.

And without that, I think we’re running a risk of having a sort of a u-shaped, a more weak recovery, much like we had in the ’90, ’91 recession.

MARGARET WARNER: Now, Alan… go ahead.

ALLAN MELTZER: Remember– we have to remember… that there’s a tremendous amount of monetary stimulus and fiscal stimulus in the economy now, and second, we have to remember that the computer and high-tech sector is about 6 to 7 percent of the economy. There’s the other 90-odd percent that might do better.

MARGARET WARNER: But, Mr. Walberg, Alan Greenspan also mentioned that because consumers had kept spending through this recession– in fact, the third quarter of last year was up 6 percent, I guess they were buying all these cars at 0 percent financing– that there is not the same kind of pent-up consumer demand that you often see at the end of a recession when consumers have held back.

BOB WALBERG: Well, I think that’s true. There is not a pent-up demand, but there doesn’t appear to be any slowing of demand, either. You continue to see robust consumer spending in all areas and whereas the, you know, the cheap financing money may have stolen sales from future months of cars, we are still seeing strong sales with apparel, we’re still seeing strong sales in housing, we’re still seeing strong sales in appliances.

So we’re seeing sales… consumer sales in a lot of areas. And I would suggest that there is no sign of slowing in that area, so I think the consumer side of the economy remains solid.

MARGARET WARNER: So who are the workers who– why is unemployment still going up? If we talked about who in the work force is going affected, are they the people at the lower end?

BOB WALBERG: Well, the unemployment will usually continue to go up because it is a lagging indicator. Even though the economy–.

MARGARET WARNER: But explain that. What do you mean “lagging?” Why?

BOB WALBERG: I’m doing that. As the economy will expand, corporations will kind of hold back before they have new hiring until they see that the economy is indeed on solid footing. As we said, we’re in the early stages of the economic recovery so there’s unlikely to be any new hiring for at least another quarter or so.

I think if the economy continues to expand over the next few months, you’ll see businesses gradually go back to hiring new people so that they can meet the new demands. So hiring is almost… or, employment, is almost always a lagging indicator, and I think that’s the case there.

MARGARET WARNER: Mr. Meltzer, Alan Greenspan– again, going back to what he had to say– he talked about the amazing resilience– I think he called it remarkable resilience– of the American economy, particularly after the terrorist attacks.

I’m just wondering whether you think there is something larger going on here, that our… that the recession was milder and shorter than any other one since World War II, but that the recovery might be, also — of course, I know you don’t totally agree with that, but is there anything at work– fundamental in the American economy– that is.. that might be evening out the swings, or not?

ALLAN MELTZER: Yes, there are two things. I think there are two things, or three, that are quite exceptional about the present situation. One is we have never seen a counter-cyclical monetary policy like the one where we’ve been going through. I mean, the Fed eased quickly, it eased by larger amounts than it ever did before.

Back in the 1960s and ’70s, I often accused them of being pro-cyclical, that is making business cycles worse. They certainly didn’t do that this time. They really responded very well to producing lots of money, lowering interest rates.

Second, we’ve had a lot of fiscal stimulus. The tax cuts, there are more tax cuts to come, the government is spending a lot of money for defense, new materials, and so on. They’re short of some of the equipment, so there is going to be a lot of government spending that’s coming along, and that’s certainly going to add strength to the economy.

And the third thing, which we shouldn’t forget, is that we’ve had this remarkable surge in productivity in this country, productivity growth did not show any signs of backing down during the recovery.

So on one side we have strong stimulus to demand, on the other side, we have strong output growth… potential output growth, because of the productivity rise. And those things are going to make for a better outcome than people expect.

MARGARET WARNER: Do you think, Mr. Montgomery, that that productivity growth– all that investment that was made in the late ’80s and early ’90s that made businesses more efficient– did that help carry the American economy through this recession?

EDWARD MONTGOMERY: Absolutely. I mean, I think it helped extend… remember, we just came off the longest expansion in our nation’s history. Many people didn’t think that we would have, through the whole decade of the ’90s, that kind of sustained growth where even into year 2000 we were getting, in some quarters, 6 percent rates of growth.

So that was the direct product of the productivity growth that we had, which enabled us to have both rising wages, rising productivity, increasingly rising output. That, I think, is the kind of stuff that we should probably expect to see in turnaround when we start getting back on our feet now.

MARGARET WARNER: And Bob Walberg, your thoughts on whether this economy is fundamentally different in a way that is evening out these cycles.

BOB WALBERG: Well, I think the other two gentlemen have hit on some key points. One is obviously the improvements in productivity growth and then the second one would be the immediate and somewhat drastic response by the Fed in reducing rates. They moved very quickly, very sharply, and obviously that’s helping to shorten this downturn.

However, I would caution that the increase in government spending is something we can’t count on going forward. And it will be somewhat of a drag on economic growth in future quarters, that I think if you’re going to have a robust recovery, has to be offset by business investment. If it’s not, then I think you’re looking at, you know, relatively modest economic growth.