There are some signs that the recession that began last March has already started to ease.
The Federal Reserve sees enough signs of strength in the economy
that they decided to leave interest rates unchanged.
Their statement about the future, however, does say that the risks are more on the side of weak growth rather than accelerating inflation – which shouldn’t be a surprise given very low rates of inflation.
On the Fiscal side, the economic stimulus package looks to have died in the Senate – which is probably just as well, since by the time any package would be passed, implemented, and had its effect felt, the recession would most like be long over.
GDP is Positive
The Department of Commerce recently announced that Gross Domestic Product (GDP) rose in the third quarter of 2001 by 0.2%. This was a surprise as many people expected a continuing decline in output, thus marking a continuation of the recession that began in March.
In fact, it now appears growth was been positive for 3 of the 4 quarters of 2001.
One commonly cited definition of a recession is two or more consecutive quarters of negative output growth, as measured by GDP. So did the recession-namers jump the gun?
The National Bureau of Economic Research (NBER) announced last November that the recession began back in March 2001 even though we had only seen one quarter of negative growth. The NBER, which has become the authority on dating business cycles, does not use the two-quarter definition above, but rather looks at a wider range of economic data. The NBER probably thought that the terrorist attacks on 9.11 would prolong and deepen the downturn that was already evident at the time – and was therefore probably confident that we’d see two quarters of negative growth. Some of the other data such as employment and industrial production also looked very much like the beginning of a classic recession.
In principle, we could define recessions differently – rather than defining a recession as shrinking output, we might want to define a recession as output growth that is persistently below some normal or average rate. Click here for a more extensive description of the definition of a recession.
However, if the economy did indeed hit bottom sometime in the fourth quarter of 2001, then we will have seen, by historical standards, a short and very shallow recession.
Another piece of very good news is that productivity growth for the fourth quarter came in at a very healthy 3.5% annual rate.
Unemployment Rate dips
The unemployment rate, after having risen to 5.8% from a low of 3.9% took a dip down to 5.6% in January. The unemployment rate is commonly seen as a lagging indicator (that is, it tends to react slowly to broader economic events), so if there is a continuing decline in the unemployment rate, it is a signal that the recession has already ended.
Employment appears to be stabilizing as well. Total nonfarm employment declined by a smaller amount that in any of the past 4 months.
Industrial Production (IP) began to decline well before the official March beginning of the recession. IP has shown a dramatic decline leading up to and during this recession. In early and mid 2001, the NBER noted this decline but held off declaring a recession until the downturn had spread to other sectors of the economy.
In December, IP dipped by only 0.1%, while 13 of the previous 14 months saw a greater monthly decline. While not exactly great news, at least the dip seems to have stabilized.
Consumer confidence saw a drop at the start of 2001, and another large drop in September. However, after hitting a low in November, we’ve seen two months of increases.
Backdrop of Stable Prices
Over the past several years, many people thought that we were “one recession away” from price stability – it looks like we’re there: the consumer price index declined by 0.4% in December. Prices have also fallen in the second half of 2001, and for the entire year, inflation was only 1.6%.
The lack of inflation, as well as the strong productivity growth numbers, should give the Fed plenty of cover to keep interest rates low for the foreseable future.
Reading the Economy
While each of the numbers above is merely one piece of the economic puzzle and should not be taken as conclusive, the overall picture is one of an economy that may have hit bottom. Of course, only time will tell if this is true, and other events may again shock the economy in the meantime.
Overall, the economic future is looking brighter than it did only a couple of months ago.
Filed under: Economics, Economy, Monetary Policy, Recession