Yes, We Have No banana. . .

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Yes, We Have No Recession . . .

By Robert J. Samuelson

Wednesday, August 22, 2001; Page A19

Back in the late 1970s, Cornell University economist Alfred Kahn briefly oversaw the Carter administration's voluntary wage-price guidelines. Kahn was (and is) a jovial soul whose power and influence suffered from his stubborn candor and sense of humor. He once irked the White House by suggesting that rampaging inflation might lead to a recession or a "deep, deep depression" -- an assessment that Carter's aides promptly disavowed. Kahn retreated and promised that, in the future, he would refer to a recession as a "banana." He later shifted to kumquat after a big banana company complained.

We are, it seems, now in a comparable situation. No one wants to utter the "R" word, because it signifies a symbolic threshold that, if crossed, might worsen consumer, business and investor psychology. The silence is rationalized by the popular convention of defining a banana as two consecutive quarters of declining economic output, or gross domestic product. This hasn't happened yet, unless the GDP statistics are revised downward -- which is possible.

But most other business indicators suggest that the economy is already in a banana, or soon will be. Consider:

• Industrial production has declined for 10 consecutive months and is now 4.2 percent below its high in September (source: the Federal Reserve).

• Employment reached a peak in early 2001 and has dropped by 259,000 jobs, according to a survey of businesses, and 620,000, according to a survey of households (source: the Labor Department).

• Newspaper help-wanted ads have been falling since February 2000 and are down 36 percent (source: the Conference Board, a research group).

• Airline traffic has dropped every month since February compared with the same month in 2000 and is down 1.2 percent for the year. Air cargo has fallen 8.7 percent (source: the Air Transport Association).

• Business investment in equipment, machinery and software has slipped 5.1 percent since the third quarter of 2000 (source: the Commerce Department).

• Corporate profits dropped almost 12 percent between September and March (source: Commerce).

• States' sales-tax collections, adjusted for inflation, grew a meager 0.3 percent in the first quarter of 2001, down from 5.4 percent a year earlier (source: the Nelson A. Rockefeller Institute of Government).

Not everyone reads this list fatalistically. "We believe the fair value of the S&P 500 at the end of 2002 should be 50 percent above the index's level today," said the brokerage house of UBS PaineWebber in a full-page ad in the Wall Street Journal. "Look for U.S. economic growth of 3-4 percent next year, driven by the following: the tax cut; aggressive easing by the Fed; lower energy costs; and the end of the inventory correction." Some economic statistics support this upbeat theory. In July employment rose, according to one survey; initial claims for unemployment insurance have abated. Housing construction remains strong.

But mainly, the economy still seems to be recoiling from the effusive business investment and consumer spending of the late 1990s. "It's really quite unusual for airline traffic to turn negative," says David Swierenga, the Air Transport Association's economist. Indeed, it last happened during the 1990-91 recession. The only encouraging spin that can be put on most of today's dreary economic statistics is that declines are modest compared with those of the full 1990-91 recession. Then, industrial production dropped 4.6 percent, employment almost 2 percent (against less than 0.5 percent today) and states' sales-tax revenues 6 percent to 8 percent.

What has so far prevented two quarters of shrinking GDP has been housing construction and solid, though not spectacular, consumer spending. Even so, GDP rose at a puny annual rate of 0.7 percent in the second quarter, and when a revised figure is published on Aug. 29, it may show a decline. There are also signs that consumer spending -- which had been growing at about half last year's rate -- could be weakening. Retail sales have been flat for two months.

"We're now going through the second wave [of the slowdown] when the consumer pulls back," says Lakshman Achuthan of the Economic Cycle Research Institute. He isn't reassured by today's relatively low unemployment rate (4.5 percent in July), which, arguably, might bolster consumer confidence and spending. He points out that, in every post-World War II recession before 1980, unemployment started from a level roughly equal to today's or lower. In the 1957-58 recession, the jobless rate rose from 3.7 to 7.5 percent. In the 1973-75 slump, the increase was from 4.6 to 9 percent.

In Achuthan's view, more layoffs lie ahead. This implies that business investment may fall further and that the "inventory correction" is far from complete. Already, factory utilization is the lowest since July 1983. If consumer spending falters, so will utilization. Why would businesses invest more? Similarly, companies are trying to cut inventories (supplies of goods) to match lower sales. Once excess supplies have been sold, production and employment should revive. That's the theory. Unfortunately, sales have so far fallen faster than inventories, so that the critical "inventory-to-sales ratio" has risen.

Surplus supplies and slackening demand create downward pressure on prices and profits that, in turn, push companies toward more layoffs and fewer investments. Average air fares are 8 percent lower than a year ago, says the Air Transport Association's Swierenga. Price discounting is rampant in computers, cars and magazine and TV ads. Last week Dell Computer announced a quarterly loss of $101 million.

The designation of business cycles falls to a committee of six economists from the National Bureau of Economic Research. The bureau looks for a "significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail trade." But the bureau makes its call six months or more after the economy has turned. Until then, Achuthan says: "If this isn't a recession, it's the worst non-recession you'll ever see." Actually, make that a banana. Or kumquat.

http://www.washingtonpost.com/ac2/wp-dyn/A43717-2001Aug21?language=printer

-- Martin Thompson (mthom1927@aol.com), September 01, 2001


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