Contrast that "pain" with a stark and surprising fact. In October car sales in the United States hit an all-time high. How grave is the United States' pain if discounted prices can produce record car sales in the midst of the country's economic agony?
This is the central economic debate for the U.S. and, by extension, given the key role of the United States, for the global economy at the moment. Is the U.S. recession over, as so many economists believe? Is the U.S. economy ready to recover, about to recover, on the point of recovering, so that all that high-spending pain--it's true: it's agony deciding between a Dodge and a Ford at these prices -- is over?
Consider the evidence, just as Greenspan did Friday. Some recent statistics have suggested that the economy, as Greenspan put it, is "stabilizing." Jobless claims -- fresh claims for unemployment benefits -- have recently been running below 400,000 per week as against rates of between 400,000 and 500,000 for most of the fourth quarter of 2001. The December employment report showed that the factory work week rose by 0.4 hour to 40.7 hours so that aggregate hours worked rose for the first time since January 2001. That could be taken as a sign that the decline in the manufacturing sector is at an end; most economists did take it to mean that.
Consumer confidence has rebounded. The Conference Board's index for December showed the index leaping to 93.7, from 84.9 in November. The Expectations Index, in which consumers give their view on future prospects, also leaped, from 77.3 to 91.5. Americans have become much more confident about the economy. They do believe recovery is near at hand.
Greenspan himself has done as much as he could to foster that revival in confidence. His 475 basis point (4.75 percentage point) cut in interest rates in the course of 2001, taking the short-term interest rate down to just 1.75 percent, can probably be characterized as the most dramatic softening of interest rate policy in U.S. economic history. Is it not staggering that so dramatic a change in policy has occurred in what was, until 2000, the "miracle" economy?
In comments Friday, Greenspan reflected on this change of policy and on the state of the economy. The picture he drew was a realistic one of an economy which had suddenly been confronted with a dire risk: "a self-reinforcing cycle of contraction ... Such an event, though rare, would not be unprecedented in business-cycle history."
Greenspan is alluding here, almost certainly, to the Depression of the 1930s and the slump in Japan in the 1990s. In interviews with UPI, Professor Milton Friedman has pointed to the ominous parallels with those periods. Consciously, then, Greenspan has acted to avert a repeat of previous disaster, a disaster that would have begun, though probably not finished, on his watch. "The magnitude of policy adjustment," Greenspan said Friday, "responded ...to the strength of the forces restraining demand."
But has the medicine worked? Is the U.S. economy now free of the great and unusual danger with which it was suddenly confronted? Though the tone of his remarks was, as usual, positive, Greenspan himself, perhaps to the stock market's discomfort -- the Dow dropped again through the 10,000 level Friday -- did not make that entirely clear.
"For the household sector, which had been a major stabilizing force through most of last year's slowdown, the outlook for demand is mixed," Greenspan said. There were two main reasons, in Greenspan's view.
First, "the restraining effects from the net decline in equity values presumably have not, as yet, fully played out," he said. In other words, the fall in equity markets since the first quarter of 2000 has had a depressing effect on consumer spending, and this negative wealth effect may continue to have an influence.
The second factor was unemployment. "The unemployment rate may well continue to rise for a time," Greenspan said, "and job losses can be expected to put something of a damper on consumer spending."
It is the consumer that has buoyed the U.S. economy so far. While businesses have cut back investment, Americans have gone on spending freely -- and not just on consumer goods, but on houses. The housing market has been part of the U.S. economy's resilience and, though Greenspan did not point this out, rising real estate prices have meant that one category of asset prices have not come down at all, but have continued to rise, boosting consumer confidence and spending.
"Attractive mortgage rates have bolstered both the sales of existing homes and the realized capital gains that those sales engender," Greenspan said. And indeed the housing sector is enjoying its third consecutive year of activity and prices at all-time record levels. Can that go on? Are the inflated prices being paid for houses not a legacy of the stock market boom that ended in the first quarter of 2000? The danger for the housing market is that its only route now is down -- down from never surpassed peaks. This is another factor against which the economy must battle in coming months and even years.
The gloomier comments in Greenspan's speech have an agenda and a target. Some of Greenspan's medicine has been undone. He has cut short-term interest rates dramatically but long-term interest rates have fallen little, and in recent months have tended to rise. "The recent rise in these rates," Greenspan said, "largely reflects the perception of improved prospects for the U.S. economy. But over the past year, some of the firmness ... probably is the consequence of the fall of projected budget surpluses and the implied less-rapid paydowns of Treasury debt."
Perhaps here Greenspan was taking a side-swipe at the executive and the Congress for the marked worsening of the budgetary position -- though he has generally been supportive of tax cuts. But Greenspan may quite deliberately have suggested Friday that recovery in the U.S. economy may not be so swift in order to talk down yields on long-term debt. If you cannot cut interest rates through rate cuts, why not talk them down?
For debt is becoming more and more the fuel on which the U.S. economy keeps running. There is not only the boom in mortgages but also a renewed surge in consumer credit. Consumer credit, we learned this week, rose by $19.9 billion in November to $1.65 trillion, the Federal Reserve said. This was the largest ever nominal increase in consumer debt in one month. Most analysts took the rise as a sign of strength: consumers, confident again, are borrowing and spending. But, in reality, though consumer confidence dropped in 2000 and 2001, consumer spending never did. The latest surge in consumer credit is further indication that the 1990s consumer boom in the United States has not yet ended; that the recession has so far only been one in business investment. Encouraged by cheap money, soaring real estate prices and discounted prices for goods, Americans have just kept on spending and racking up debt. Pain? For most Americans this recession is phantom; it has not even happened.
So what's wrong? If Americans keep spending, are we not all out of trouble? The problem is that the household spending trend cannot go on inexorably. Falling interest rates and rising debt cannot avert forever a drop in spending to more reasonable levels.
At some point, American consumers, like American businesses, must cut back. Say it again: they have not yet begun to.
The threats to recovery are far greater than Greenspan will say. He is right to point to household spending and the housing market as crucial factors. In every previous U.S. recession, consumption has fallen in at least one quarter. In this recession, consumption has remained not just positive, but quite strong, rising by average annualized rates of 2.2 percent in the first three quarters of 2001. And yet, having risen by an average of 4.9 percent in 1999 and 2000, having been fed by a ludicrous boom in stock prices, having been fostered since by cheap money, it probably needs to fall by more than average in this recession.
Is it dawn? As the dark days of 2001 drew to a close, with record borrowing, record car sales, record house prices, this is what we all wondered.
But perhaps those days were not so dark after all. Perhaps night has barely fallen. If that's true then dawn must still be a long way away.
(Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to email@example.com.)
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