That Was No Recession, That Was A `Contained Depression'

The U.S. economy has been laboring in first gear ever since a relatively mild recession ended in March, 1991, right? That's what most economists believe. Indeed, the accepted wisdom is that stronger growth is just around the corner. But not according to David A. Levy of Jerome Levy Economics Institute. This was no mere recession, he says--it was a "contained depression," and we're still in it.

Levy points to the relative weakness of profits as a key sign of the economy's underlying problems. Profits, which normally are up almost 60% at this stage of a recovery, are up only 25% (chart). Payrolls hit bottom 11 months after the recession's official end. The reason, Levy believes, is that the U.S. has entered a new era of sharply reduced capital spending, with private investment dropping from its traditional level of 14% to 17% of gross domestic product to below 13%. This fall has been caused by overcapacity and excess debt, which take longer to right than the overproduction and excess inventories that typically cause business cycles.

These troubles have been brewing for decades, according to Levy. Since the mid-1960s, capacity utilization in manufacturing has been sliding, from 92% to 85% at its last peak in 1989. Office-occupancy rates, too, have been in a long-term decline. Both phenomena stemmed in large part from speculation. When the bubbles--including real estate, junk bonds, art, antiques, even baseball cards--began to burst, that triggered the collapse in fixed private investment.

Compared with the Great Depression of the 1930s, this "depression" has been contained by two new factors, says Levy. The financial system is protected by such safeguards as deposit insurance and a Federal Reserve willing to pump money into a sluggish economy. And the federal government spends nine times the share of GDP that it did at the beginning of the 1930s, putting a floor under economic growth. Indeed, the danger at this point, says Levy, is that well-intentioned politicians may take too large a cut out of the federal budget deficit, depriving the economy of needed support.

Levy is not all doom and gloom. He sees the economy slowly healing itself, with balance sheets improving, overcapacity easing, and restructuring of vital manufacturing industries well under way. Eventually that will mean a revival in investment, perhaps even a boom. But the recovery could be a long drawn-out affair: Levy sees the current "depression" lasting to 1996.