Deep Into 'Recession'

It's Already Fall, Analysts Say, and Economic Winter Is Around the Corner

By Steven Pearlstein Washington Post Staff Writer Saturday, November 3, 2001; Page E01

Now that nearly all economists agree the U.S. economy is in recession, some have moved on to debate where we are in the process.

In Churchillian terms, things have probably gone beyond the end of the beginning. Many now believe a recession started during the summer, if not before.

But it's too early to declare this the beginning of the end. The key indicators -- employment, production, profits, incomes -- are not only falling, but falling faster than before.

Simply put, Americans are now likely in the stomach-churning, confidence-busting, penny-pinching middle of what may turn into the deepest recession in 20 years.

"We're entering the worst of the downturn now," said forecaster Allen Sinai of Decision Economics. "For the next three to five months, it's going to feel pretty awful." That's three to five months more of relentlessly downbeat business headlines and economic reports. More layoffs, plant closings and eye-popping corporate losses. More corporations and households slashing their budgets.

That is what recessions are all about. And then somehow, almost mysteriously, they end. Of the 10 recessions since World War II, none has lasted fewer than five months nor more than 16, with the average around 11. Many students of the business cycle believe that this recession is likely to be a bit longer and deeper than average. The good news is that it may be nearly half over.

"If this were a baseball game, I'd guess we would be in the bottom of the fourth, maybe the top of the fifth," said economist Richard Berner of Morgan Stanley.

The official timekeeper of recessions is the independent National Bureau of Economic Research. The NBER dating committee relies heavily on four pieces of monthly economic data, all of which have now slipped into recession territory: industrial production plus manufacturing and trade sales, both of which peaked a year ago; payroll employment, which has been falling since the spring; and real personal incomes minus government transfer payments, which turned down only last month.

All recessions are different, but they tend to fall into one of three categories.

The garden variety recession occurs after the Federal Reserve raises interest rates in an effort to prevent or reduce inflation. Those recessions usually begin with a sharp downturn in the purchase of new homes and cars and a pileup of inventory in factory warehouses and on store shelves.

Then there are those that appear to be triggered by some external shock, like the Arab oil embargo of 1973, the Gulf War in 1990 or the Sept. 11 terrorist attacks.

A third type follows periods of over-optimism, over-borrowing and over-investment. Once the investment bubble finally bursts, a dynamic takes hold in which shrinking profits lead to cutbacks in purchases of new equipment, layoffs and, eventually, declines in consumer spending.

This time, the economy's decline shows characteristics of both a shock and the bursting of an investment bubble, making it particularly hard to forecast.

Victor Zarnowitz, a member of the NBER recession dating committee who has written extensively on the business cycle, argues that these investment-led recessions tend to be longer and deeper than average, for several reasons. They are less responsive to the Fed's interest rate medicine, for one. And it takes more time for an economy to work off excess production capacity than excess inventory.

Also indicating a longer, deeper recession in the United States is the fact that economies are also weak almost everywhere else in the world -- the first such simultaneous downturn in nearly 30 years.

Other factors, however, are working to minimize the length and severity of a recession.

A big one is that the Fed moved early and aggressively to lower interest rates, beginning last January. Not only did Fed actions have the effect of keeping the housing and auto markets robust, but they allowed corporations and households to lower their monthly debt payments.

Also, unlike past recessions, this one is taking place in the context of falling oil prices, not rising ones.

The final script for this recession is likely to be written during the next three months, according to Goldman Sachs economist William Dudley. The first round of layoffs, he argues, is largely complete. The question now is whether those layoffs will lead to such a pullback in consumer spending that it will trigger yet another round.

Nobody knows when the economy will start to rebound, but economists look for different signs that the recessionary process is losing steam.

Because the stock market traditionally turns up before the economy does -- five months ahead, on average -- some look to Wall Street indexes as leading indicators. Some analysts have interpreted this week's gains in the face of dismal economic news as just such an encouraging signal. But even those who think they see the end of the bear market acknowledge that it can't begin until the recent lows are "tested" -- Wall Street-speak for one last sell-off that would send prices back near the levels of Sept. 11, but not below.

Others economists, like Zarnowitz, keep an eye on the length of the average workweek:When sales finally begin to pick up, he reasons, managers' first move will be to ask existing workers to put in more hours rather than hiring more employees.

Sinai prefers to keep his eye on monthly consumer spending. "Companies won't begin to add employees or purchase new equipment until sales pick up," he said. "This recession won't be over till the consumer says the coast is clear."

http://www.washingtonpost.com/ac2/wp-dyn/A32679-2001Nov2?language=printer

-- Martin Thompson (mthom1927@aol.com), November 03, 2001