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2001 – The Economic Year in Review

2001 has been an interesting year for the economy. We’ve seen the beginning of the first recession in a decade and have had to deal with the after effects of 9.11. The Federal Reserve has cut interest rates 11 times, and a large tax cut was passed over the summer. Here’s my brief look back at the Macroeconomy in 2001.

Impulse response

The first
shock of the year was seen as a decline in investment spending that occurred
at the end of 2000 and the beginning of 2001. The decline in the stock market,
an increase in interest rates many months earlier, high levels of pre-millennium
technology investments, and rising oil prices are possible candidates for
causes of this initial shock.

The investment
shock had an impact primarily on industrial production and did not quickly
spread to other sectors of the economy – consumer spending and services remained strong in the first part of 2001. The result was a slowdown in
the rate of growth of GDP and employment, but not yet an overall decline
in activity. In March, unemployment reached a peak – this peak in
unemployment was the reason the NBER put the date of the beginning of the
recession in March.

The economy
might very well have recovered quickly from this initial shock – there
was a tax rebate on the way, the Federal Reserve had cut interest rates
dramatically starting in January and continued through the summer. In addition,
the slowdown had not spread much beyond manufacturing.

Then came
the attacks on September 11. The IMF recently estimated the impact on the
U.S. economy will be in range of 21 billion, and they lowered their forecast
of GDP growth in 2002 by 1.5%. While the weakness had been narrow, September 11 greatly impacted the consumer – in particular, airlines, hotels and other travel services were greatly impacted. As the shock spread throughout the economy, unemployment increased, and in the third quarter GDP fell by 1.1%.

Around this
time the NBER announced that they had put a date on the beginning of the
recession. Until sometime in October, it was not entirely clear that the
slowdown would be long enough, deep enough, or broad based enough to merit
an official recession announcement.

11 can then be seen as a second shock to the economy that pushed the economy over the edge.

What the future holds

It has been historically very difficult to predict economic turning points – that is, those times that the economy transitions from expansion to recession
and the reverse. Since WWII, recessions have lasted for an average of 11
months. Given this, the current recession that began in March 2001 might
be expected to end around February 2002. However, if this recession is a
“double dip” with one shock in March and another in September,
then the recession might be expected to last until late summer or even the
fall of 2002.

Policy over
the past year, as well as declining oil prices, ought to provide a significant
boost to the economy, but, again, it is hard to predict the final impact
on the economy.


The Federal
Reserve has already cut interest rates 11 times this year to historic lows – the federal funds rate is currently 1.75% (as of 12.20.01.) Since monetary policy takes time to
act – on the order of 9 months to 15 months for peak effect –
there is still considerable monetary stimulus “in the pipeline.”
Over the summer, a tax cut was enacted that contained a rebate (Democratic
proposal) along with phased in income tax rate reductions (Bush / Republicans).
As these reductions are phased in, the economy might get a boost.

The open
question is whether these stimuli combined with the natural resilience of
the US economy might be all that is needed to pull the economy out of recession.
Under debate now are options for a fiscal stimulus that might contain payments
to businesses and unemployed workers. (The bill as passed by the house 12.20.2001
currently contains little stimulus and in it’s current form would
be unlikely to do much for the broader economy. It looks unlikely to pass
the Senate anyway.)

The Political
rhetoric – who is to blame?

Who caused the recession? Bush or Clinton? The answer is likely neither. The economy was beginning to be slightly weak in very late 2000. There were no Clinton policies (or policy changes) that could explain a downturn beginning in
early 2001 and that could also be reconciled with a decade of continuous
expansion. On the other hand, there was not really enough time for Bush
to do much to alter the path of the economy in such a short time after the
election. (Although in December 2000 and January 2001, Dick Cheney was repeatedly heard speaking about how the economy was slowing – talk which many
people thought could hurt consumer confidence and thus the economy. Consumer
confidence did in fact take a sharp drop down at the beginning of the year.)

Of course,
there is a slight possibility that the anticipation of a policy change might
cause a slowdown. In terms of investment spending, an anticipation of tax
incentives for investments might delay firms spending. Alternatively, anticipating
a drop in marginal tax rates in the future, workers decided to work less
today and more next year – an idea sometimes called an intertemporal
substitution of leisure (and which is a bit far-fetched in my book).

Either way,
the recession is now Bush’s to deal with. Historically, the president
tends to get the blame or credit for economic conditions, so Bush’s
continuing response will be an important factor as his term marches on.
However, to the extent that the economy matters during elections, it appears
that it is primarily the recent past that voters care about. It is likely
that the economic events of this year and next will be long forgotten in
November 2004.

Filed under: Data, Economy