August 17, 2001
History Offers Old Lessons for the New Economy
The joke about economic forecasters is that when they miss the target by ten feet to the left on their first shot, and ten feet to the right on their second, they think they've won the prize. But when it comes to making the call on where the U.S. economy is going, it’s the famously fuzzy-thinking economists who may be getting it right, while many of those who labor in the trenches of the real business world are missing the boat.
The science, or art, of economic forecasting is largely a historical exercise. We spend most of our time looking at the road the economy has already traveled, going back over decades, or even centuries, to perfect the tools we use to cast our eyes ahead. We greet groups of business people, whose brows are wrinkled with worry about the coming months, with stories and graphs depicting economic downturns now ten years past.
That may sound like ivory tower irrelevance, except for one thing. Pronouncements about "new economies" notwithstanding, the regular dips and bumps in the up-and-down cycle of economic activity over the years have more in common with those of the past than most of us realize. Two concrete examples bear this out.
The continued weakness of the U.S. economy, in the face of an unusually aggressive course of interest rate cuts served up by the Federal Reserve, has caused some to speculate that some new phenomenon -- the crash of the technology sector, globalization, the Bush administration -- is pulling the economy into recession. Does the Federal Reserve policy even matter anymore?
A glance at history suggests that it does. In fact, it is having an impact as we speak. We frequently forget that before the Fed started cutting interest rates at the beginning of the year to stimulate the economy, it had done everything in its power to slow the economy down.
History has shown that it takes anywhere from six to twelve months for changes in Fed policy to show up in the performance of the economy. That means we're still feeling the effects of the Fed's tightening last fall, with more months to wait before the stimulus of January rate cuts show up in more spending in the second half of the year.
Another frequently expressed concern hits closer to home, namely, the plight of Indiana manufacturing jobs lost in the current downturn. Based on the depressed levels of capital spending, poor corporate earnings, and generally glum outlook, some have said that Indiana will not get back any of the 30,000 manufacturing jobs lost statewide since last fall.
But standing in the teeth of a manufacturing slowdown is a tough spot to make that call. Historical experience would predict a rebound, although not all the way back to the overheated levels at the close of the decade. In fact both capital spending and employment levels in manufacturing facilities statewide tumbled in each of the last two economic downturns, only to rebound nicely in the subsequent recovery.
Most mainstream forecasters are still calling for an uptick in economic growth for the second half of this year, although many have pushed the turning point back to the fourth quarter. That's not the quick response that those who applauded the Fed's aggressive stimulus earlier this year had hoped for. But those who have seen these moves play out in previous economic cycles know that its right on schedule.
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