What a difference a number can make especially if the number is the U.S. economy’s growth rate, and if it is moving into positive territory.
If the trend holds up, it means that the recession, which officially began last March, is over dramatically changing America’s economic and political landscape, and robbing the Democrats of their strongest issue in the 2002 midterm elections.
Last week’s announcement by the Commerce Department that the economy began growing again in the last three months of 2001, by an admittedly anemic 0.2 percent, caught most analysts by surprise. The median consensus among Blue Chip corporate forecasters was that the fourth-quarter GDP would shrink by a little more than 1 percent or more, following the minus 1.3 percent decline between July and September that was largely caused by the September 11 terrorist attacks.
But, a combination of factors, including stronger-than-expected consumer buying, especially auto sales, a burst in government spending for the war on terrorism and flattened inventories that sparked a 2 percent increase in factory orders in December. The Bush tax cuts, enacted in May, and 11 straight interest rate cuts by the Federal Reserve Board were also big factors in pumping liquidity into the economy.
The fourth-quarter GDP estimate will be revised in the months to come, but there was a general consensus last week that the worst is over, and that the recession has bottomed out.
Nearly two months ago, I reported in this column that the recession would turn out to be “short and shallow,” a description subsequently picked up by senior administration officials in their remarks. If the annual GDP rate remains positive, the recession “will have been one of the mildest on record,” writes The Washington Post’s economic analyst John Berry.
The improved economic picture will have major political, fiscal, social and global reverberations in the coming year. Among them:
Renewed economic growth is vindicating the administration’s tax-cutting policies. President Bush argued a year ago that the tax cuts were needed as “an insurance policy” in the face of a slowdown in the economy, or other unforeseen events. How right he was.
As the economy worsened, the Daschle Democrats continued to question the tax cuts, and some called for their repeal, while the administration maintained that the tax cuts would help put the economy back on track. That is exactly what is happening now.
However, the economic turnaround will make it more difficult, if not impossible, to get the accelerated tax cuts that Mr. Bush still wants to speed up the recovery. Fed Chairman Alan Greenspan said a week ago that a stimulus bill may not be needed, and it appears he may be right.
With Mr. Bush’s polls in the 80s, the only substantive issue the Democrats had going into this year’s elections was the recession. That appears to be disappearing before their eyes. Republican control of the House seems safer, and there is a glimmer of hope that the GOP could take back the Senate.
Budget deficit projections should shrink, too. A growing economy will boost tax revenues, and that will mean lower deficits for both the U.S. Treasury and the states and the return of the surpluses sooner than expected.
There is, as Mr. Bush argued in his State of the Union address, a strong connection between national security and economic security. America will be better able to afford whatever it takes to hunt down the tens of thousands of terrorists who are still at large around the world, build a nationwide homeland defense apparatus second to none, and to research and develop a new generation of technology to guard against future attacks.
An economic recovery will mean higher stock market prices, and much improved investor confidence as 401(k)s and other pension mutual funds grow in value. This, in turn, will begin to restore the “wealth effect” that will erase concerns brought about by the Enron debacle. Consumer confidence, already growing in the past few weeks, will soar.
The U.S. economy is the linchpin of the global economy. When we grow, so do other countries that trade with us. Our comeback will help strengthen foreign markets.
Unfortunately, the unemployment numbers are always the last to improve in a recovery, because businesses try to produce more with the workers they have until their earnings grow enough to begin rehiring. We’ve lost 1.4 million jobs since March, most in manufacturing.
Still, there was a marked slowdown in layoffs in December and the jobless rate fell from 5.8 percent to 5.6 percent last month, largely due to disappointed workers who have stopped looking for employment.
How strong the recovery will be is another matter. And, there is always the danger of another terrorist attack, which could trigger an economic setback. But, inventories are so low that analysts think a burst of durable goods orders to replenish them will mean a much stronger comeback in the first quarter than anyone expected.
All of this should remind us of J.P. Morgan’s famous warning to pessimists and political mischief-makers alike: “Anyone who bets against the American economy will lose.”