June 11 , 2003
According to the Wall Street Journal, Robert Hall, chairman
of the National Bureau of Economic Research's dating committee is not sure how
to label the current economic condition in the United States.
This is not just a struggle by one economist, as the dating committee is
responsible for declaring when recessions begin and end.
When John Mitchell and Arthur Burns began examining the
characteristics of business cycles well over half a century ago, they felt that
common conditions prevailed in all business cycles. For example, if this was the second year of economic
recovery, above normal economic growth and profit rebounds that are two and a
half times the growth of economic activity should be expected.
According to another member of the dating committee, Robert
Gordon, this is the second year of an economic rebound.
But growth is anemic, employment is falling, and profits are growing only
slightly more than economic activity.
Is this the end of business cycles as a meaningful measure
of the stages of economic contraction and expansion? Or is this an anomaly that will be ignored when a more
pronounced pattern of cyclical behavior is identified?
Two factors are most troubling to Professor Hall.
First, employment should not turn down sharply after only a year of
economic expansion. Employment may be slow to rebound, as employers use their
existing work force more extensively until they are convinced that the expansion
is for real.
Indeed, productivity gains during this expansion are very much in line with the productivity rebounds that accompanied most early phases of expansions. However, the workweek usually continues to expand until rising orders finally convince employers to hire. Instead, the workweek has contracted while employment is falling even as productivity gains are slowing. This behavior occurs when an economy is stalling.
Second, measures of economic friction, such as rising
sensitive prices, higher short term interest rates, rebounding hourly wage
increases, begin to turn positive early in an expansion.
This time, those indicators, which are contained in what are lagging
indicators, continue to fall.
On the other hand (successful economists tend to use two
hands), recessions do not persist
when economic activity expands for six consecutive quarters.
This expansion is decidedly weak, but most economists would be upset if
the dating committee said the recession has not yet ended.
Furthermore, profits are growing faster than economic
activity. The leading indicators
are positive and growing faster than prevailing conditions.
That normally means that activity will strengthen nine to twelve months
down the road.
We are valuing our corporate enterprises much more highly
than only six months ago. To be
sure, falling interest rates increase the value of any future earnings (is that
not what an enterprise is about). However,
if rates are falling because of a weakening future, earnings would be marked
Of course, the stock market has had false starts before.
Indeed, the Dow Jones has reversed direction after attaining current
levels four times in the past year. A
fifth reversal from these levels would be quite discouraging.
Thus, a decisive break through current levels will be needed to convince
some investors that these higher stock values will not soon disappear.
In short, I understand why Professor Hall is troubled about what to call current conditions. Some similarities with past expansions exist, but they are weak and not numerous enough to look like a typical expansion. If it does not look or act like an expansion, maybe it is not one.
Which leads back to the other question I raised.
Is it time to bury the concept that business cycles with persist patterns
To some extent, all recessions are different.
However, profits fall sharply during contractions and rebound strongly
early in expansions. Stock prices
tend to lead economic activity. Interest
rates fall about a year into an expansion and then start to rebound. Inflation remains tame early in an expansion and then begins
to rebound after a year of above normal growth.
This time, those typical patterns have not persisted.
Some bad patterns also are absent now.
Bank lending capacity has not been eroded
by the recession. Federal
budgetary policy is much more expansive than in many previous anemic recoveries. (Who cares about the deficit anyway when interest rates are
It does not look like a recovery, but neither is it
consistent with a recession. Perhaps
we need to restore Jimmy Carter's description of economic malaise.
(Although, in his case, it was the onset of recession which followed very
predictable cyclical patterns).
Or maybe, the concept of business cycles no longer means
what it did when Mitchell and Burns were about their work.