January 17, 2003
In Search of a Silver Lining
Can the U.S. economy grow at the same time as manufacturing output shrinks? That's the question that will be answered with the release of the preliminary estimates of Gross Domestic Product for the fourth quarter of 2002 later this month. That's also when the rosy forecasts of many economists -- who tell us that the recession of 2001 is in our rear view mirrors -- run smack into the cold reality of the fourth quarter data on the U.S. economy.
It's been a gruesome quarter for the manufacturing economy. According to the Federal Reserve's Index of Industrial Production, the output of the manufacturing economy contracted at a 2.2 percent annual rate during the final three months of 2002. The driving forces behind this decline were the continued slump in business equipment production, and an end to the upward push in motor vehicle output.
We have now moved beyond the point where we can characterize the performance of manufacturing as simply "spotty." We must acknowledge that factory output is now in the midst of another significant decline. The consequences of that fact, particularly for a durable goods-dependent state like Indiana, are anything but pleasant.
The employment reports for the national economy in recent months have also turned more maudlin. The so-called "job-less" recovery of mid-2002 was much maligned at the time, but we'd gladly trade it for what we've seen since. In the last two months of 2002, payrolls in the U.S. economy have been cut by 189,000 jobs. Overall, employment in the national economy ended the year falling back to its level of May 2002.
At this writing, the predictions that third quarter growth would steal from the fourth appear to be ringing true. After double digit increases in sales volume in July and August, motor vehicle sales have been an equally large negative surprise ever since. That swing alone can explain much, but not all, of the industrial sector's woes. Overall the output of automotive products contracted at a 4.3 percent annual rate in the final three months of 2002.
The silver lining in all of this just seems to get thinner. We can speculate, as some have, that the data on industrial output have declined in quality, since the electricity sales data on which they are based have become harder to acquire in the post-deregulation age. We can point to the economy's last remaining bright spot -- the housing industry -- which continues to defy gravity even as it fails to pull along its traditional partners, the furniture and construction equipment industries.
Or we can continue to observe the economy from a safe enough distance so that these individual sores and warts are not as apparent. After all, we know that interest rates are low, inflation is almost non-existent, and that the economy has expanded for four consecutive quarters. Will that be enough to push us through these gloomy reports to keep the fragile recovery alive? That's a question we'll know the answer to very soon.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
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