You Heard It Here: Recession Won't Last The Summerby
There has been much sloppy talk of late about the recession. One-day housing starts or some such indicator registers a long-awaited uptick, and the optimists burst out like daffodils. A few days later, a bad employment report brings back the doom-and-gloom crowd. Maybe this recession is going to be a whopper after all. What's a person to think?
My answer is simple: to ignore the daily barrage of statistics and concentrate on the fundamentals. There is little in the recent data to shake our faith in the forecast of a mild recession, ending in late spring or summer, that I and many others made last fall (BW -- Dec. 3, 1990). It may yet prove wrong. Those who predict the future do so at their peril. But we have no reason to back away from the forecast now.
GRADUAL BRIGHTENING. What are these fundamentals? The first point is that with recessions, as with baseball games, it ain't over till it's over. And this one is most assuredly not over. As long as the recession continues, the economy slides downhill. So, until it hits bottom, we must expect a series of negative reports on this or that. Remember that the first three months of 1991 were probably the worst quarter of the recession, and we are now getting March readings. So, for example, the rise in unemployment from 6.5% in February to 6.8% in March was no surprise. Nor does it mean that the recession will last beyondsummer.
The second point is that the "light at the end of the tunnel" analogy is terribly misleading. Economies do not suddenly emerge from the darkness of recession into the bright glare of recovery. The transition is normally gradual, with the first months of recovery looking little different from the last months of decline. Unemployment is high, there is plenty of spare capacity, and profits are depressed. Sales, though perking up, are still weak.
Third, the popular forecast of a mild recession did not mean a trivial recession. Americans were going to notice this recession, and they have. Rather, the consensus forecast was for a below-average recession, and that prediction appears to be coming true. As this is written, no estimates of gross national product for the first quarter have been released. With data in hand on only one down quarter--the last quarter of 1990--any measurement of the recession at this point must rely on guesswork. Here is mine.
In the last quarter of 1990, real GNP declined 0.4% (1.6% on an annualized basis). The first quarter of 1991 appears to have been worse, so suppose GNP declined an additional 0.8%. That would make the drop to date just 1.2%, compared with a postwar recession average of about 2.2%. Will we sink a further percentage point? Not likely. Let me sketch two scenarios.
In the optimistic scenario, the current quarter is flat or up, so the recession lasts just two quarters and is half as bad as its predecessors. In the pessimistic scenario, the first quarter of 1991 turns out far worse than most people think--say, a 4.5% annual rate of decline--and the economy shrinks again in the second quarter at roughly a 2% annual rate. Even that would leave the cumulative decline in GNP at 2%, which is still a tad below average.
MENACE TAMED. Many factors point toward the optimistic rather than the pessimistic end of this range. Several can be summarized by noting that the main concerns of the fall look less menacing today. The U. S. has not suffered a financial spasm. The oil shock of 1990-91 turned out to be puny. U. S. exports have done swimmingly. And consumer confidence has snapped back. There have also been a few pleasant surprises, such as the stock market boomlet and the behavior ef inventories. The latter bears further comment, for it has been insufficiently discussed in the media.
The dynamics of a recession normally follow a classic pattern. For a while, the economy is sagging but not collapsing. Then for a few months, sales fall sharply. With sales dropping like a stone, businesses that previously judged their inventories to be roughly in line with sales suddenly find themselves overstocked. To rid themselves of inventory now deemed excessive, they scale back orders or production, which reduces upstream jobs. Unemployed workers spend less, sales fall further, and the rout is on.
Recent data make it look unlikely that the standard script is being followed this time. Why? Because companies pared their inventories late last year even though sales were not yet falling. This last must sound odd, especially if you sell automobiles or houses. But for the economy as a whole, real sales to final customers actually rose even though GNP, which measures production, declined. How can that be? The answer is that a small inventory accumulation in the third quarter gave way to a rapid inventory liquidation in the fourth. In consequence, production fell, even though sales rose.
This is a very encouraging sign for the coming months. Since companies were unloading inventories in advance of any decline in sales, they are unlikely to find themselves stuck with unwanted stocks of unsalable goods. Unlikely, but not, of course, impossible. As I said, it ain't over till it's over.