September 26, 2001
Two words have been bandied about because of what happened in New York and Washington. They are "recession" and "war."
My former classmate Robert Hall, who is head of the committee responsible for making such calls, may not think a recession is brewing. However, rising unemployment claims even before the terrorist attacks and the subsequent layoffs at the airlines and some travel industry segments suggest that a recession is now occurring.
Industrial production has been declining for more than a year and definitely has fallen more than in many previous recessions. Employment only began to decline in May, but now appears to be falling more than in several recessions. Inflation adjusted business sales almost certainly were negative in September, but do not yet show a strong declining trend.
Real earnings have not declined, but that exception is more the result of falling energy prices than rising wage incomes. In my mind, this is a recession, even if Bob Hall's committee never meets to determine if one should be officially declared.
I also believe the disruptions of recent weeks probably tilted the evidence toward labeling this a recession. Yet, that does not mean that a recession is just beginning. Manufacturing has been in decline for more than a year. Employment has been falling for six months. Indeed, the evidence strongly suggests that the latest disruptions accentuated the decline, but may also have hastened its end.
As a result of the plunge in activity during that horrible week, retailing almost certainly will be climbing upward in the next few months. Central banks have pumped massive liquidity into the world economy. Although most of this liquidity has been absorbed by frightened consumers and investors, some should drift into increased economic activity.
Government spending for recovery and replacement also should add more activity to the economy. Any additional spending needed for the war effort will add even further to government spending.
To be sure, some of this increased activity might be offset by reduced spending by uncertain consumers and investors. This sometimes happens for short periods of time. However, the increased liquidity and government spending eventually should overcome uncertainty fears.
There are risks to this assessment. The key ones are that the disruptions caused serious financial dislocations that will spawn further weakness. Fortunately, U.S. financial institutions can shoulder the problems while the ailing airline industry apparently will receive a crutch before it collapses to the ground.
If there are hidden financial problems, they will come from abroad. The Japanese banks cannot handle a renewed period of prolonged economic weakness. On balance, however, this recession is nearer its end than its beginning.
Just as investors automatically sell stocks when they hear recession, some people automatically assumed that war means doing without. Visions of converting auto plants into tank factories may be dancing in the heads of some.
Unfortunately, wars take on characteristics that cannot be understood when they begin. Nevertheless, this war will not be economies responding to massive needs. Quick strikes, stealth, and technological skills rather than massive beach heads and large mobilizations are probably the order of the day.
At the same time, victory will be harder to determine. An increase in recruitment and resources for an extended period is more likely than massive economic conversion. We will not run out of sugar, as we did during the Korean conflict or go to mass mobilization, as we did in World War II. Hording groceries will not be required.
Instead, a higher defense budget for an extended period and increased recruitment of our young sons and daughters probably will be the order of the day.
For most, war may hardly be more than a mild inconvenience. Indeed, government debt might actually continue to fall, but at a much slower rate than anticipated only a few weeks ago. But there will be casualties. And the terrorists may again try to bring the battle to our shores.
One only hopes that our determination will erode the arrogance and pride that now resides in the hearts of the terrorists and that they will be much less successful in their recruiting than we are in ours.