February 6, 2002
The surprising 0.2 percent gain in the gross domestic product for the fourth quarters confirms what my internal estimates of monthly economic activity were indicating. Some even suggest that the gain eliminates the recession designation.
There is virtually no likelihood that the recession will be declared to never have existed. The loss of 1.2 million jobs, widespread employment declines by industry, nearly a 2 percentage point rise in unemployment, and the second lowest use of available capital since World War II more than amply justify the recession label for this period.
I have written before that three recessions during the twentieth century were declared despite the absence of two consecutive quarters of declining GDP. Unless revisions eliminate the fourth quarter gain, this first recession of the 21st century may have only one quarter of negative activity, but it will remain a recession.
The more interesting question is whether the recession now is over.
As I already mentioned, my monthly estimates of economic activity showed little change in November and actual expansion in December. Thus, a recovery might have begun toward the end of November. However, there are alternative explanations for that improvement in activity.
Certainly, the greatest contribution to positive consumer activity was the decline in prices. The 133 million people who still receive paychecks saw their purchasing power zoom from less than a 1 percent gain a year ago to almost three percent by the end of 2001.
Plunging energy prices and substantial auto incentives permitted much of that gain in purchasing power. If energy prices continued to plunge and auto incentives intensified, this recession would be over.
However, a quick drive past the local gasoline station shows more than a seasonal increase in gasoline prices for January. While the $2002 cash back for autos in 2002 is clever, it is far smaller than the zero financing incentive that it replaced. About a third of the previous improved purchasing power will be taken back by these price changes during the winter.
The 1.4 percent gain in durable goods orders during the fourth quarter certainly is positive, but the orders had declined so much more rapidly than shipments that even the growth of orders was not enough to increase the size of the order backlog. Capital spending may decline more slowly in the winter than in the fall, but it almost certainly will decline.
The construction of structures is just now beginning to slow. Office buildings, hotels, and commercial space probably will be declining for all of 2002.
Days between initial offer and sale for housing has more than doubled in the past year. Traditionally, this normally means that housing activity will begin to slump. There is no evidence that tradition is altered this year.
A strong dollar and weak international economies mean that exports will continue to plunge. Perhaps world economic activity will improve late in 2002 and the dollar may lose value then, but that will have little impact upon growing exports until 2003.
In the meantime, imports should rebound once inventories begin to be rebuilt in the U.S. This means that trade balances will continue to deteriorate after adjustment for prices.
Even the surprising 19 percent jump in state and local investment spending at annual rates during the fourth quarter cannot be sustained. Indeed, without this abnormal growth in state and local activity, GDP would not have increased. With state revenues falling in many states, this rapid pace of activity almost certainly will slow during the new year.
Only two significant sectors remain and I have yet to make a case for more economic strength in 2002 than occurred in the fourth quarter of 2001. Fortunately, those two sectors will make a large difference.
Federal spending is rising rapidly to improve homeland security and pursue terrorists abroad. (What candidate ran on smaller government, no nation building abroad, and open government?) The compassionate conservative has yet to show the compassion or exhibit the conservatism in economic policy. The result will be an even more rapid growth in government than during an average Clinton year.
Also, inventory liquidations almost certainly will slow and probably swing to accumulations sometime in 2002. In the fourth quarter, inventory reductions removed 2 percentage points from GDP. They probably will add a percentage point in the first quarter of 2002.
Will that be enough to generate upward momentum in economic growth? Probably, but just barely. Therefore, the mildest of all recessions probably will be followed by the weakest of all recoveries, at least in 2002.
The recession of 2001 may have ended in December, but don't tell that to the rising mass of newly unemployed, which should continue growing into the spring of 2002