March 8, 2002
Recession is Over, What's Next?
It is strangely fitting that on the same day that the Federal Reserve chairman declares the U.S. recession to be over, the U.S. House of Representatives finally passes a stimulus package with bipartisan support. While that coincidence of events probably says as much about our political process as anything, it also points out a lag in perceptions about the economy that is common to all of us.
Much of that lag has to do with the way we learn about how the economy is doing. In the months of November and December, we adjusted our mindset to cope with the first recession the U.S. economy had experienced in ten years. Yet even as many forecasters were gloomily predicting a turnaround at the mid-point of the next year, the economy was turning under their feet.
After one round of revision, the fragile growth in the U.S. economy indicated in the preliminary report on U.S. Gross Domestic Product (GDP) did not vanish, as some thought it would. Instead it got stronger. The Bureau of Economic Analysis now puts overall economic growth at a respectable 1.4 percent in the final three months of 2001. That brings a surprising amount of momentum into 2002, and has prognosticators everywhere bumping up their forecasts for the remainder of the year.
Our ways of thinking about the economy might take longer to change. If the actions of Congress are any guide, we are still hunkered down for a recession. But the data are increasingly telling us that the overall contraction in the economy has stopped. On the heels of the upward GDP revision comes the news that personal income, and especially after-tax income, grew strongly in January, as did factory orders. And the Bureau of Labor Statistics tells us that the six month-long streak of job losses was snapped in February.
Growth in the economy is far from robust, of course. And doubtless there will be negative signals from some sectors of the economy in the coming months. But the recovery has made enough headway for us to turn our attention to what we can expect in the post-recession period immediately ahead.
In the modern economic history of the United States, some of the fastest growth quarters on record have been in the immediate wake of a recession. That will probably not happen in 2002, however. Just as every recession is different, so is the recovery. And with the highly leveraged motor vehicle and housing industries essentially sitting on the sidelines as the rest of the economy went down last year, its likely they will be similarly uninvolved with the business pickup this year.
What is more likely is an upward swing in business spending, particularly on technology-related equipment and expertise. Both have been hit with savage cuts over the past twelve months. But the eroding competitiveness of products and services in the wake of these budget cuts will force businesses to pump money into new development.
The only question is when. If the growing confidence in the economic recovery starts to show up in support for new capital offerings, it may be sooner than we think.
About the Author
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