- The Washington Times - Friday, March 1, 2002

This week, Federal Reserve Chairman Alan Greenspan all but declared an end to the year-long recession. Employing the familiar "Greenspan-speak" that has made parsing his statements an art form, the Fed chairman declared, "[T]he typical dynamics of the business cycle have re-emerged and are prompting a firming in economic activity." Then, on Thursday, the Commerce Department essentially confirmed Mr. Greenspan's declaration of imminent recovery, reporting in its preliminary assessment that the economy expanded at an inflation-adjusted annual rate of 1.4 percent during the fourth quarter.

If subsequent economic activity confirms the Fed's forecast, which projects an economic growth rate between 2.5 percent and 3 percent for 2002, the 2001 recession will have been one of the shortest and mildest economic downturns in postwar history. Three points are noteworthy. First, economic output will have declined in only one quarter (by a 1.3 percent annual rate during the third quarter). Second, and even more remarkably, the recession will have officially ended with unemployment near 5.5 percent, depending upon the month of the economic trough that will be determined by the National Bureau of Economic Research, the official arbiter of such matters. Third, the 2001 recession will have ended with inflation having been completely subdued. Indeed, with the personal consumption expenditure price indexes for both durable and nondurable goods having registered price declines during the last two quarters of 2001, the danger of insidious deflation cannot be downplayed.

Given the mildness of the 2001 downturn, it should not be surprising that the pace of recovery will not be as robust as upturns that followed much deeper slumps. Thus, complaints charging that the Fed's range of projected growth for 2002 is too timid are groundless. Besides, the Fed no doubt would welcome faster growth. After all, Mr. Greenspan and his colleagues demonstrated during the second half of the 1990s that they believe the sustainable long-run, non-inflationary growth rate of the U.S. economy is closer to 4 percent than to 2.5 percent. However rapidly the recovery ensues, the important point is that Mr. Greenspan strongly hinted in his testimony that increases in short-term interest rates are not imminent.

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"An array of influences unique to this business cycle," Mr. Greenspan astutely observed, "seems likely to moderate the speed of the anticipated recovery." In the past, for example, consumer spending has often led the recovery from recession. But during the 2001 downturn, which was essentially caused by a collapse of business investment spending, consumer spending more than held its own. In fact, underlying the 1.4 percent growth rate for the fourth was a 6 percent increase in personal consumption expenditures, the fastest pace since the second quarter of 1998. Unfortunately, however, nonresidential fixed investment accelerated its decline during the fourth quarter. Even though excess inventories have been whittled down, significant overcapacity remains, and, therefore, the prospect for robust investment growth must be discounted.

As the apparently incipient expansion proceeds, one conclusion seems certain: The reason this recession was so short and so mild is the Fed's aggressive interest-rate cuts throughout 2001 11 reductions in total and the Bush administration's counter-cyclical tax cut, which, in retrospect, seems to have been enacted at the perfect moment.

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