By Christopher Farrell Turning and turning in a widening gyre
The falcon cannot hear the falconer;
Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world....
-- William Butler Yeats
In recent weeks, I've noticed a number of thoughtful Wall Street researchers abandon their typical rational dissection of the economic figures to dwell on Yeats's haunting poetry of foreboding portent. The reasons are painfully obvious. The Israeli-Palestinian conflict. High gas prices. The fear of a double-dip recession. The deep mistrust of corporate chieftains. The pervasive pessimism among stock investors. The disgust at Wall Street analysts. The WorldCom debacle. The yawning current account deficit. Even the crisis of confidence shaking the Catholic church contributes to the dark mood.
Well, let's take a deep breath. The unfolding big-picture story is the strength and resilience of the U.S. economy. The dominant view that the expansion will be weak or will falter is fueled by the suspicion that a bounce-back from a mild downturn must be anemic. The thinking goes that prospects are mediocre at best in an economy without pent-up consumer and business demand waiting to be unleashed. But the economy isn't a pendulum or a zero-sum game. The surprise could be how quickly the forces defining the New Economy reassert themselves and growth resumes at a steady pace -- reminiscent of the late 1990s.
UNDERLYING STRENGTH. Let's go back to the spring of 2000, when the problems began. The stock market lost $5 trillion in value, business investment collapsed, and corporate profits vaporized. Then, at the end of last year, energy giant Enron filed for bankruptcy. Worst of all, it goes without saying, was the horror of September 11. Nevertheless, the recent recession was the mildest in U.S. history, with the economy declining only 1.3% in the worst recorded quarter (the third quarter of 2001).
Now, fast-forward to this year. The economy expanded at an encouraging 5.8% rate in the first quarter, although the pace of activity has slackened somewhat in recent weeks. The Institute of Supply Management index (formerly the National Association of Purchasing Management index) shows that the manufacturing sector has expanded three months in a row after contracting the previous 18. Corporate profit margins are widening, with productivity rising at a 7% pace in the first quarter, estimate economists at Merrill Lynch. That improved corporate performance is reflected in the declining layoff tally during the first three months of 2002. Despite a raft of bad news on the political and corporate earnings fronts, consumer confidence remained strong in April.
Those forecasting a double-dip recession aren't paying enough attention to the basic forces underpinning the economy. Technological and business innovation is flourishing. Management continues to reap greater efficiencies from reorganizing the workplace and investments in information technologies.
POSITIONS VACANT. One striking sign that management and labor are producing more with less is that productivity rose at a 1.9% pace for all of last year -- a critical measure of the economy's vitality that typically falls during a downturn. Another heartening sign is the 11% jump in patent applications from 2000 to 2001, according to the U.S. Patent & Trademark Office. Patent applications are up 67% since 1996. And with consumer price inflation running at 1.4% over the past year, the Federal Reserve is under no pressure to hike its benchmark short-term interest rate and derail the expansion.
Yes, the unemployment rate could reach as high as 6% over the next few months. But that increase will largely reflect the impact of more laid-off people deciding that, with the economy improving, it's time to look for work once again. These optimistic job-seekers get counted as unemployed. But as the summer unfolds, entrepreneurs will start complaining bitterly about a dearth of workers.
To be sure, all bets are off if the Middle East crisis worsens. But barring a widening of the conflict between Palestinians and Israelis, or another devastating terrorist attack on U.S. soil, the economy is poised once again to surprise on the upside. Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online