Tuesday, November 27, 2001

The U.S. economy showed signs of stabilizing yesterday even as the official arbiter of recessions declared that history’s longest expansion ended in March with the emergence of widespread job losses.
The National Bureau of Economic Research’s Business Cycle Dating Committee said the recession worsened sharply after the September 11 terrorist attacks, when a highly publicized rash of layoffs made most Americans wary that the nation’s unprecedented decade of expansion, marked by the lowest unemployment in a generation, was coming to an end.
But the economic free fall appears to have abated in recent weeks as consumer confidence, spending and unemployment stabilize, raising hopes that a recovery may start to emerge. At the start of the Christmas shopping season, retailers yesterday reported mixed results, with sales soaring at discount stores but dropping at many department stores and mall outlets from levels seen last year.
Because the average length of U.S. recessions is 11 months and the latest one is 8 months old, historical odds suggest the end is only a few months away.
But many economists say a setback in the war in the Middle East or another terrorist attack, among other potential developments, could cause the recession to drag on for much of next year.
President Bush said he knew the economy was in trouble from the day he took office in January, which was why he pushed immediately for approval of $1.35 trillion in tax cuts. The official declaration by the decades-old economic think tank in Cambridge, Mass., headed by former Reagan economic adviser and Harvard economist Martin Feldstein, appears to vindicate the administration’s strategy.
Many other political and business leaders from Washington to Wall Street as well as most economic forecasters in the spring were insisting that the economy was only in a slowdown and was on the verge of an upswing, even as it was falling into recession.
“I remember the debate clearly about people saying, well, the economy is strong,” Mr. Bush said. “But it wasn’t. It was flagging, it was weakening.”
The president called on Congress to pass another economic-stimulus plan by Christmas. “We will do everything we can to enhance recovery,” he said.
The loss of more than 600,000 jobs in the last two months, following smaller net job losses during the spring and summer, convinced the Cambridge committee that growth peaked and the economy entered recession in March. A massive downturn in manufacturing and technology resulting in 1 million job losses in those sectors alone began much earlier in September of last year.
“The total contraction in the economy is sufficient to merit the determination that a recession is under way,” the committee of six eminent economists said in a statement.
Incomes, adjusted for inflation, continue to grow, it said, but that is more the result of a sharp drop in oil and other prices than any growth in wages and hours.
Analysts stress that the economy has many underlying strengths that are softening the impact of the recession and may bring it to an end sooner rather than later.
“We have much to be thankful for,” said Ed Yardeni, chief investment strategist with Deutsche Banc Alex. Brown.
Unemployment remains at the low level of 5.4 percent despite a sharp increase from 3.9 percent in the last year, while average gasoline prices have dropped to $1.13 in recent weeks and interest rates are the lowest in a generation.
“The economic recession is likely to remain shallow and should end by next spring,” he said.
The uncertainty that stifled the plans of consumers and businesses alike after the terrorist attacks also appeared to be lifting, he said, as the government made headway day by day in its war on terrorism.
Even Americans’ fear of flying should start to dissipate with the enactment of airline-security legislation, which Mr. Bush signed last week.
“The major risk is that consumer spending might weaken significantly in early 2002” as a result of proliferating layoffs, he said. A survey by the Conference Board, a private economic research firm, found that employers were contemplating another round of layoffs at the end of the year.
For the nearly 4 million people already unemployed, “it is becoming harder to find a job because many firms have imposed hiring freezes,” Mr. Yardeni said. “Also, the coming bonus season will probably be the worst since the early 1990s,” hitting higher-paid employees particularly hard.
Nariman Behravesh, chief economist of the DRI-WEFA forecasting group, said the recession is likely to be mild because consumers are getting support from Mr. Bush’s tax cuts, falling energy prices, the Federal Reserve’s pre-emptive interest-rate cuts and a generally healthy banking system.
But he said any setbacks in the war on terrorism could dampen consumer and business confidence and worsen the recession.
Adding to the risks of this recession, he said, are the slowing major economies in Asia and Europe. With massive amounts of excess capacity, businesses worldwide will continue to cut jobs and production until demand picks up. Only then can they start hiring again.
Strong demand from American consumers kept the world economy afloat for years until it started flagging recently in the wake of rising unemployment. Now, the prospects are flat at best.
“Our forecast of a pickup in consumer spending early next year depends heavily on congressional passage of a fiscal-stimulus bill,” Mr. Behravesh said. “Since both parties and the president want one, we expect something will be worked out in time.”

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