I think it's possible that the US won't suffer a recession during 2001.
Recessions are "officially defined" by the unofficial NBER as involving "at
least two quarters of falling GDP." But this is a capitalist definition of
recession, measuring the recession by looking at an index of market
activity (GDP) rather than by examining the human impact. And it's quite
possible that (real) GDP could grow during 2001 while unemployment also
goes up. That is, because of the normal growth of the labor force (new
people seeking jobs) and of labor productivity ("technological
unemployment"), GDP has to increase by about 2 percent during a year to
keep the unemployment rate from rising (Okun's "Law"). Of course, rising
GDP and rising unemployment is what the US saw at the start of the 1990s
(the so-called "jobless recovery") and used to be called a "growth
recession." Alan Greenspan might call it a "soft landing," but I'd call it
a working-class recession.
On the other hand, since the Fed can't fine-tune the economy when the three
bears are growling and the accelerator effect threatens to kick in, a "hard
landing" is also possible.
At 10:03 AM 2/26/01 -0500, you wrote:
>The economy
>
>Hard luck, hard landing?
>Feb 22nd 2001 | NEW YORK AND WASHINGTON, DC
>(www.economist.com)
>
>America has been promised a soft landing. Consider an alternative
>
>"DO YOU think we are going to have a recession?" The questioner is a
>stranger, clad in an elegant fur coat, in a lift on Fifth Avenue in
>Manhattan. It is the question all Americans are asking. When the question
>was put in Congress last week to Alan Greenspan, the chairman of the
>Federal Reserve, he replied "No". Unfortunately, he said the same in
>September 1990, when it is now clear that a recession had already started.
>
>According to the latest survey by Blue Chip Economic Indicators, 95% of
>economists agree with Mr Greenspan: America is not sliding into recession.
>But this is less reassuring than it sounds. Economists rarely succeed in
>predicting recessions. Economic models are not much help for spotting
>turning-points in the cycle. And many economists are reluctant to stick
>their necks out.
>
>A disturbing number of leading economists in America have privately
>admitted to The Economist that they are more worried about a recession
>(defined as at least two quarters of falling GDP) than their official
>forecast might suggest. Even Stephen Roach, a notorious bear at Morgan
>Stanley, is predicting only two quarters of shrinking output, and average
>growth of 0.9% for 2001 as a whole. That would make it the mildest
>recession in history. But, as Mr Roach admits, it is hard to forecast
>recession, let alone deep recession, when your firm sells equities.
>
>Certainly, the trend is gloomy. The average prediction for growth in 2001
>in The Economist's poll of forecasters has fallen from 3.5% in October to
>1.8% early this month. Actual GDP growth slowed from 5% in early 2000 to
>1.4% in the fourth quarter. Many economists expect growth of barely 1% in
>the first half of this year. Even without a recession, that would feel like
>a bumpy landing.
>
>So far, the main driver of the downturn has been the business sector. As
>profits have been squeezed and weaker sales have caused inventories to pile
>up, firms have started to trim their investment and production. Mr
>Greenspan is keen to portray the current slowdown as mild and short-lived.
>Firms have already started to slim their excess stocks, he argues, so the
>usual inventory correction should take place more rapidly than usual,
>allowing the economy to bounce back more swiftly.
>
>The behaviour of consumer and corporate spending will determine whether
>this happens without a recession. John Makin, an economist at the American
>Enterprise Institute, believes there is a serious overhang of capital
>investment. Even without a recession, capacity utilisation in manufacturing
>has fallen to its lowest level since 1992. With excess capacity and falling
>profits, firms are likely to cut their investment plans this year.
>
>The most useful economic indicator to watch is consumer confidence. Mr
>Greenspan has likened the sudden break in confidence before past recessions
>to "water backing up against a dam that is finally breached." It is
>difficult for monetary policy to deal with such a sharp break in
>confidence. The University of Michigan's consumer-confidence index remains
>above its level in previous recessions. But it has just seen its biggest
>three-month fall since the start of the last recession (see chart). And, as
>Bill Dudley, an economist at Goldman Sachs, argues, the rate of change in
>confidence may have a bigger impact on growth in spending than the absolute
>level.
>
>Last year, households' saving turned negative for the first time since the
>1930s, as people spent their increased stockmarket wealth. Debts also
>climbed to record levels in relation to income. If share prices continue to
>weaken from their still over-valued levels (see article), that "wealth
>effect" will surely go into reverse. If nervous consumers suddenly decide
>to save more and spend less, a serious recession could follow.
>
>What would really cause consumer confidence to crumble is big job lay-offs.
>So far unemployment has barely increased. But if firms in the
>"just-in-time" economy reduce inventories and capital spending more swiftly
>than in the past, as Mr Greenspan has argued, then why might they not also
>cut jobs rapidly? A spate of recent corporate lay-offs from the likes of
>Dell, DaimlerChrysler and Sara Lee augur poorly.
>
>Liquid refreshment
>
>Most economists and investors still have faith in the ability of the Fed to
>prevent a recession through interest-rate cuts. With inflation well under
>control, the Fed has plenty of room to cut interest rates. At least, that
>was the argument before the poor inflation figures for January were
>published. Consumer prices rose by 0.6% in the month, twice as much as
>expected, to give a 12-month increase of 3.7%; the 12-month rate of
>producer-price inflation jumped to 4.8%, its highest for ten years. This
>may be just a blip, caused by higher energy prices, but the Fed's room for
>aggressive easing may be shrinking.
>
>And even if rates are cut by another half point at the Fed's next policy
>meeting on March 20th, there is no guarantee of how quickly this will work.
>Monetary policy always operates with long lags, but with record levels of
>debt and excess capacity, lower interest rates may be even less effective
>than usual in spurring new spending. Easier monetary policy can certainly
>shorten recession, but, given America's financial and economic imbalances,
>it may be too late to prevent one altogether.
>
>All this leaves one final, predictable reason for optimism. Mr Dudley
>points out that investors and consumers (presumably like the woman in the
>fur coat) still believe Mr Greenspan can avert recession; that helps to
>underpin confidence. Undeniable. Yet, if a recession were to occur, the
>shock to confidence could be severe-like discovering that the emperor had
>no clothes after all.
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
