The Beige Book, a Federal Reserve survey of regional economic activity, said Sept. 19 reports "generally indicated that overall economic activity remained sluggish in August and early September, with several suggesting that activity slowed further."
The Beige Book summarizes comments from businesses and other contacts outside the central bank. The report followed an Aug. 8 survey that reported similar findings.
Despite these findings, the National Bureau of Economic Research, the official arbiter of when the economy has entered a recession, has yet to make a formal announcement. Nor is the NBER likely to until 2002 because announcement dates lag recession's onset. The March 1991 trough of the last U.S. recession, for example, was not announced until December 1992.
In January, I observed the economy had already entered recession (Donrey News Service, Feb. 12). My forecast was based on developments including inversion of the yield curve in June 2000; contraction of industrial production--one of four key indicators used by the NBER to determine recession's onset--especially manufacturing output; declining credit standards and fractures in the credit structure; and unsustainable consumer wealth effects from equity valuations based on a new and unrealistic metrics.
On this latter point former Federal Reserve Chairman Paul Volcker appears especially prescient: "The fate of the world economy," Volcker said in 1999, "is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings."
The Fed's findings are part of a trend apparent in 2001 to any American curious about economic conditions. The Beige Book (Jan. 17)stated, "Manufacturing activity weakened in all districts in December."
The May 2 report said, "Almost all districts report a slow pace of economic activity ... Manufacturing activity continues to weaken across districts, with demand having fallen in most industries."
The June 13 report said: "Most districts report that economic activity was little changed or decelerating in April and May."
Allowing markets to eliminate malinvestments, and a combination of monetary (Fed easing) and fiscal (tax and budget) policies, are the proper responses to recession. There is a lag between the time monetary policy is enacted and when it takes effect. Volcker once said, "The Federal Reserve is often not in control of things, particularly in the short run. Sometimes the markets are in control of events rather than the other way around." There is also a fiscal policy lag. The 1981 Reagan income and capital gains tax cuts did not have a major impact until mid-to-late 1982.
The Fed has eased and Washington has cut taxes--the proper fiscal response. Fortunately, there are signs Washington is prepared to cut taxes even further to stimulate capital investment. Recessions are deeper and more severe when the proper fiscal policy is not implemented.
There has been an overabundance of optimism for most of 2001. Much of this sentiment is a carryover from the so-called "New Paradigm" thinking of the late 1990s that argued the business cycle had been repealed. Today, conditions have reversed and there is an overabundance of pessimism regarding the U.S. economy.
Best-selling books forecasting Dow 36,000 and popular news accounts of Internet stock billionaires heading firms with no earnings have been replaced with stories like "Dow Headed Toward Worst Week Since Depression." The terrorist attacks were cowardly and destructive and have increased fear and uncertainty in many quarters. Given recent events it is important to remember economic recovery always follows the recession phase of the cycle upon us. Historical perspective, not panic and fear, are called for under the circumstances.
Post-war recessions have lasted an average of 11 months, with the November 1973-March 1975 and July 1981-November 1982 contractions lasting 16 months apiece. The last recession, July 1990-March 1991, lasted eight months. Seven of the nine recessions in the post-war era lasted less than a year.
Expansions, by contrast, have lasted an average 50 months since 1945. Entering 2001 the U.S. economy had been in expansion for a record 118 months, surpassing the gains of 1961-1969 (106 months) and 1982-1990 (92 months).
Average quarterly economic growth (real GNP) exceeded four percent in the year following four of the last five recessions. The exception followed the 1990-91 recession when average quarterly GNP was 1.9 percent. Growth was most explosive in the four quarters following the two most severe recessions (1973-75 and 1981-82), averaging more than six percent. The most severe recessions are followed by the strongest economic upturns.
U.S. economic weakness so apparent late last year and in 2001 will not be solved by collective denial. Fiscal stimulus, including a reduction in federal capital gains taxes is necessary to address the current downturn. Economic recovery, like recession, is inevitable. But recovery will occur sooner, and more dramatically, if policymakers act forcefully and without hesitation.
(Economist Greg Kaza is executive director of the Arkansas Policy Foundation, a public policy think tank.)
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