The Recession That Wasn't
Whoa! The ground under the American economy just shifted dramatically with the startling announcement that the country may never have fallen into recession in the first place. After looking at preliminary data, the Commerce Dept. said that gross domestic product for the fourth quarter of 2001 actually rose at a 0.2% rate instead of falling 1%, as widely expected. That means that only one quarter, the third, dropped into negative territory last year. It may not be much solace to the 1.7 million Americans who have lost their jobs since the slump started in March, but it usually takes two down quarters to make a recession. Unless these numbers are revised down--and they may be--the U.S. hasn't had a standard recession. Once again, this business cycle surprises. Washington policymakers and corporate executives should take note. The economic downturn, one of the mildest in recent history, seems over. Recovery is at hand. There appears to be no need for further fiscal and monetary stimulus.
What's behind the surprise? In a word: productivity. In previous downturns, productivity growth fell sharply. This time, however, it held up remarkably well as the economy plummeted from a 4% growth rate in 2000 to about 1% last year. A high rate of productivity growth fortified margins and allowed corporate managers to continue giving real wage raises to most employees even as they laid off large numbers of workers. In effect, we had a New Economy downturn characterized by strong productivity growth. Aggregate consumer spending never really dipped, as it has in the past, and people kept buying record numbers of cars and houses.
The economy's new flexibility also made a big difference this time around. The shift of most companies to contingent workers during the '90s allowed them to shed labor far more easily and quickly than ever before. And just-in-time inventory systems allowed manufacturers to cut inventories at record rates, setting the stage for a rebound.
The big question ahead is the strength of the recovery. Conventional wisdom holds that it will be weak, at least through the first half of the year. Unemployment is sure to rise to well over 6% as productivity growth permits companies to increase production while continuing to cut costs by letting employees go. And because consumers are already spending at a good clip, demand doesn't look like it will rise all that much over the next 12 months.
Another unknown is business spending. Capital spending on high-tech equipment to boost productivity has been the driving force for growth for much of the past decade. It needs to kick in to bring the economy back up to its potential growth of about 3% a year. Conventional wisdom holds that companies won't begin to spend on capital equipment until the latter half of 2002. But it just may be that higher productivity rebuilds profits faster than expected, and CEOs start spending on high tech earlier. Corporate spending on high-tech capital equipment actually turned up in the fourth quarter for the first time in a year. With surprise being the norm for this business cycle, the recovery may be more robust than anticipated.
This is why the President and Congress should now back off from any further stimulus plans. Thanks to the Administration's tax cuts of last summer, fiscal policy will provide a boost of nearly one percentage point to growth in 2002. Throw in higher post-September 11 spending for defense and that could hit 1 1/2%. It's time for restraint.
Bottom line: The worst is probably over, and even that wasn't as bad as it seemed. With any luck, the recovery has already started, and it will be better than expected. For a nation still on the mend, this is good news.