The Business Cycle Isn't Dead, Just Resting

In the 1960s, years of healthy economic growth prompted economists to wonder whether the business cycle had been tamed. Then, no sooner had the U.S. government's publication Business Cycle Developments been renamed Business Conditions Digest than recession struck in 1970, and hopes that a new era in policy-making and prosperity had dawned were promptly dashed. In the 1980s, after a similarly long stretch of healthy economic growth, economists dared hope yet again that the business cycle might be moribund--but those hopes were put to rest by the recession of 1990-91.

It's apparent that the U.S. economy cannot be cured of recurrent contractions. Economic performance will continue to be marked by ups and downs, however varied in magnitude and timing those swings may be. But today, as the recovery lumbers slowly through its 30th month, it's appropriate to ask not whether the business cycle is dead, but a related and no less important question: What relevance does business-cycle analysis, based on past experience, have in today's economy?

Not very much, it turns out. It's true, as longtime students of business cycles argue, that not all recessions and expansions precisely mimic previous ones. But over the years, econo- mists and forecasters have come to believe that all business cycles move through fairly predictable phases and that basic relationships exist between economic events and their impact in various sectors. This latest expansion, though, has "broken the mold," as economist Stephen S. Roach of Morgan Stanley & Co. puts it. And that means forecasters who cling to expectations that are based on previous expansions about how strong growth should be, how low unemployment should go, and what's going to happen to inflation next are bound to be sadly disappointed. Policymakers and business executives who fail to examine closely the consequences of structural change in the economy--rather than the consequences of cyclical change--may choose the wrong strategies.

TECTONIC SHIFTS. The current expansion is exhibiting numerous unusual features--the consequence, in large part, of seismic structural shifts that are remaking the economy. The tectonics began reverberating through the economy before the recession, and they have continued to do so. Since the recovery began in the spring of 1991, these changes--from globalization to technological change--have overwhelmed the impact of cyclical factors that generally catapult growth forward. And over the next couple of years, these secular forces and new ones will continue to keep muting growth. "We've been in a period of stagnation since the spring of 1989," notes Chris Varvares, economist at Laurence H. Meyer & Associates Ltd. in St. Louis. "The recession was a relatively insignificant event in a much longer period of stagnant growth."

That may well explain why the current recovery hasn't occurred at the pace or with the strength that previous recoveries demonstrated. The gain in output registered since the upturn began in the spring of 1991 is the smallest for any expansion of greater than two years' duration since World War II. "It sometimes seems as though the economy has moved to middle age without going through adolescence--that period of economic recovery when we get rapid employment gains and dynamic growth," observes Gail Fosler, chief economist for the Conference Board.

The growth comparisons are but the most telling of many that highlight the current expansion's uniqueness. Rehiring, for instance, has been especially slow. Just about every week brings news of yet another major corporation shedding workers. US West Inc. is the latest to join the crowd, announcing recently that it would cut 9,000 employees over the next three years.

Nationwide, corporate downsizing began well before the recession, the result of cost pressures brought on by stiff international competition and heavy debt loads. Wide-spread cutbacks in defense also led to layoffs. Lower interest rates have eased the debt burden, but international competition remains brutal, and defense contractors are still retrenching. "We didn't have a typical recession, and we're not having a typical recovery," says Donald Ratajzcak, director of economic forecasting at Georgia State University. "Manufacturers aren't turning the furnaces back on and rehiring."

PART-TIMERS. In fact, it took 25 months of economic recovery to recoup the relatively limited job loss that occurred in the past recession--21 2 times longer than the 10 months such healing normally takes in the aftermath of a downturn, observes Morgan Stanley's Roach. And even though employment is growing, part-time work accounts for an unusually large 26% of new


Also different this time around is the behavior of interest rates and inflation. Usually, this far into an expansion, the Federal Reserve has already had to step in and hit the brakes at least gently, pushing rates higher to curb nascent inflationary pressures. But, again thanks to the spur of global competition, inflation has been trending down, not up. Wage pressures are nonexistent, and companies can't raise prices and make them stick. Rataj-

zcak believes that consumer prices, which rose 3% last year, could end 1993 up about 2.7% and rise by a slightly smaller 2.5% in 1994. Little wonder, then, that long-term interest rates seem finally to have shaken the inflation worries and shed their "inflation premium."

FULL-STEAM FACTOR. This expansion has been unusual not only because it has underperformed past expansions but also because it has outperformed them in one important way. The flip side of meager job growth, as it happens, has been respectable productivity growth. In the current cycle, productivity growth accounts for about 75% of the gain in gross domestic product, says Roach. That's greater than the 58% share that the early-expansion phase of a recovery has typically brought in the past. Such productivity-led growth allows businesses to log profits in a highly competitive environment, but it isn't likely to translate into higher incomes or stronger demand--the key ingredients necessary to spur growth on--anytime soon.

The global pressures that forced companies to improve productivity haven't yet played themselves out. International competition remains fierce, and European industry is now facing the same structural pressures that American industry began to confront in the second half of the 1980s. With more and more competitors swearing allegiance to cost-cutting strategies, U.S. companies will have to remain vigilant.

Health-care reform also promises to produce long-term changes in the economy. The industry, which has contributed mightily to employment and output growth in the U.S., will be less of a factor in growth. Already, drug companies and medical-equipment manufacturers are facing retrenchment.

But slow growth won't last forever--just as the much-trumpeted "soft landing" strategy of the late 1980s didn't avert recession and ease the economy onto a slow growth path as intended. Eventually, output will rebound, the forces that push inflation and interest rates higher will assert themselves, and, however delayed, a downturn will occur. In the meantime, though, it's the structural forces that are pushing and pulling their way through the economy--and responsible for what makes this expansion different from all the others.

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