The Economy: First, the Good News

• Share

Gosh, this feels good. Almost inexplicably, an economy that looked rotten two weeks ago has suddenly turned super. Construction, factories, services, retailing — you name the tune and it's got an upbeat tempo. The latest twist came Friday, when the Labor Department reported net job creation for the first time in seven months and a drop in the unemployment rate to 5.5% in February, from 5.6% the month before. Normally, unemployment continues to drift higher for a few months after a recovery starts. This could be the beginning of one of the quickest job rebounds ever.

So take a deep breath. After a brief but painful downturn marked by widespread layoffs, a morale-crushing bear market in stocks and the virtual shutdown of the travel industry post-Sept. 11, the rich smell of recovery is in the air. Even basset-faced Alan Greenspan has picked up the scent. "Recent evidence increasingly suggests that an economic expansion is already well under way," the Fed chief told the Senate Banking Committee.

SPONSORED BY LATEST COVER STORY Mars Mission Jan. 26, 2003 Past Issues Sex & Health Jan. 19, 2003 ----------------- The Real Dean Jan. 12, 2003 ----------------- Person of the Year Dec. 29, 2003 ----------------- Lost Gospels Dec. 22, 2003 ----------------- Insurgents Dec. 15, 2003 ----------------- Diabetes Dec. 8, 2003 ----------------- Love/Hate Bush Dec. 1, 2003 ----------------- Jobs Nov. 24, 2003 ----------------- Jessica Lynch Nov. 17, 2003 ----------------- Russell Crowe Nov. 10, 2003 ----------------- Medicated Kids Nov. 3, 2003 ----------------- New SATs Oct. 27, 2003 ----------------- Eating Smarter Oct. 20, 2003 ----------------- CIA Leak Oct. 13, 2003 ----------------- What Went Wrong Oct. 6, 2003 ----------------- Reagan Letters Sept. 29, 2003 ----------------- Johnny Cash Sept. 22, 2003   SPECIAL REPORTS  Tech TIME: What You Got  21 Days to Baghdad  Election 2004 PHOTOS AND GRAPHICS  Getting to Mars  NASA's Schedule  Animal Attraction  Where Sex Drive Comes From  Quotes of the Week More photos >> MORE STORIES Nation: Living in Bill's Shadow Notebook: 10 Questions for Bob Dole Science: Mission to Mars More Stories >> CNN.com: Latest News

Yet this recovery comes with some unusual baggage: the same forces that made the recession short and shallow are likely to dampen the recovery. Housing never cracked; now it won't boom. Consumers never stopped spending; now they're in debt and can't pick up the pace. President Bush's tax rebate, paid out during the worst of the recession, was "insanely well timed," says Maureen Allyn, chief economist at Zurich Scudder. Any comparable success with whatever stimulus package Congress might pass is unlikely. On the factory front, new inventory controls have given managers earlier warning of waning demand than they had in previous slumps, and led them to cut orders before goods piled up to the ceiling. The same controls will lead firms to restock slowly.

The bottom line is that the boost you're feeling may be the headiest part of the recovery for many months--and will probably be short lived at that, as businesses move quickly from paring inventories to maintaining them. But it's a solid start. Investors have bought into it big time: over two weeks, the Dow has risen 8%; the tech-heavy NASDAQ, 12%. But market sentiment can be fickle. A more encouraging sign is that productivity — which normally declines during recessions as output falls faster than hours worked — amazingly increased during the slump. The Labor Department reported last week that output per worker surged at an annualized rate of 5.2% in the fourth quarter, and rose 1.9% for all of 2001, even as the economy inched along. Productivity growth will probably continue as demand recovers, allowing employers to increase pay without raising prices or fueling inflation.

The economy's resiliency has some economists, and even the Administration, asserting that last year's tough times don't qualify for R-word status. "It seems quite clear now that our economy maybe never suffered a recession," Treasury Secretary Paul O'Neill said last week. Sung Won Sohn, chief economist at Wells Fargo, agrees: "I personally don't believe we went into a recession." By one measure they're correct. Recessions are commonly defined as at least two consecutive quarters of declining gross domestic product, a measure of national output. This slump didn't make the cut. There has been just one quarter of negative growth, last year's third quarter, when GDP fell at an annualized rate of 1.3%. GDP rose 1.4% the following quarter and is expanding now as well.

Yet the was-it-or-wasn't-it debate is plain silly in view of last year's measurable carnage. Nearly two million Americans lost their jobs. Corporate profits fell 22% in the third quarter, compared with the same period a year earlier. That was among the worst slides ever in the U.S. Household net worth fell 2.4% as part of a two-year dip--the first in 50 years. The economy, growing at a 6% rate in June 2000, was at a virtual standstill a year later — a swift deceleration with all the impact of contraction.

It sure felt like a recession, and the arbiter of business cycles, the National Bureau of Economic Research, plans to confirm on Monday its conclusion of four months ago, that a recession began in March 2001. "Industry after industry canceled Christmas parties and bonuses, cut flying and put equipment buys on hold," says Donald Straszheim, president of a forecasting firm in Westwood, Calif. "That's a recession."

As recently as late February, CEOs were still overwhelmingly guarded. In a Business Council survey, 75% said the economy was continuing to contract. Greenspan's new optimism notwithstanding, much of that gloom persists--partly in recognition that the typical recovery engines of housing and consumer spending don't have much left to give. That leads some to conclude the U.S. will suffer a double-dip recession,which means growth will be brief before the economy slips into at least one more quarter of declining output. Most recessions over the past 50 years have been double dips. But the one now ending has rewritten so many rules that it's crazy to peg a forecast to historic precedent.

More relevant are the attitudes of business owners hard hit by the downturn. "A year ago the production companies that do radio and TV for us were starving," says Joel Levinson, partner at the GFS/Levinson Group advertising firm in New York City. "You could make any deal you wanted. Now I can't even talk to them, they're so busy. Do I go out on a limb here? Not yet. On the other hand, we're starting to see some clients commit to new spending." The plants are flowering; it may just be a long wait for full bloom. Here's why:

HOUSING A hero of the recession, this market never gave in. The lowest mortgage rates in 33 years kept homes affordable even as prices escalated. Some 7 million were bought last year, when new home figures topped the previous year. Home buying spurs other economic activity, from broker fees to furniture sales and renovations. In the typical recession, housing cracks early and takes the consumer and then business down with it. Housing tends to be first to recover, providing a growth engine. Not this time. There can be no rebound from an already healthy market. There is even risk that prices will slip as interest rates rise amid the recovery.

CONSUMERS Through the recession, shoppers' confidence stayed strong and spending barely declined, thanks in part to low interest rates and wide discounting, including 0% car loans. Incredibly, a third of all outstanding mortgages were originated last year--testament to the tidal wave of home refinancings that, on average, lowered homeowners' monthly payments by $100. Those who refinanced cashed out $100 billion of equity, says Frank Nothaft, chief economist at Freddie Mac. But, says Zurich Scudder's Allyn, the cash outs "are a little like eating your seed corn. It's not a long-term solution." Moreover, the refi boom is over, and many homeowners have larger mortgages and can no longer count on rapid appreciation to build equity. "I'm scratching my head over how we can accelerate much from here," says Allyn. Consumers are as tapped out as they've ever been, devoting on average 14% of personal income to debt service, including mortgage and consumer debt.

TAX CUTS When President Bush proposed his tax rebate of up to $600 per couple, he billed it as an insurance policy against recession. Critics sniped that no government could possibly hope to time fiscal relief to offset economic stress. Call Bush lucky, but his rebates landed in the only quarter of negative GDP. They softened the downturn and helped pave the way for a buoyant Christmas quarter. Already, though, Bush's tax-cutting agenda is in deep trouble. Just hours after Greenspan hailed the recovery, the House passed a scaled-back economic package that amounts to a Republican retreat on broader tax cuts. The rebates were a one-time boost that won't be matched this year. In another policy negative, Bush's new steel tariffs--in effect, a tax hike--could spark higher prices and a trade war that would greatly damage global growth.

INVENTORY MANAGEMENT Factories led the economy down, but recent reports show the sector growing for the first time in 18 months. New-economy thinkers once believed technology-driven controls could so precisely measure supplies that there would never again be a boom-bust cycle. Timely information and fast delivery would prevent managers from overstocking. The problem is that all the inventory information in the world can't help a company with a poor forecast. Tech firms built fiber, microprocessors and servers as if clients would never get enough, and the overbuilding led to a bust.

The good news, though, is that the new-fangled "supply chain management" tools helped dampen inventory buildup as advertised, especially in old-economy industries. The ratio of sales to inventory, a measure of how much stuff is sitting in the warehouse, topped out at 1.43 in September compared with 1.75 and 1.98 the past two recessions. The downside is that the replenishing period that the economy is enjoying may start with a bang but flatten because companies carry less inventory overall. "We can respond within a day or two," says Rodger Mullen, president of Schneider Logistics, which manages an auto-parts supply chain for GM. "Ten years ago the process took eight to 12 weeks." So he needed to carry more parts to be safe. Now he can play it safe with a lot less on the line, which is why we shouldn't expect too much too soon from this recovery.

• Print
• Email
• Reprints

• Digg
• Facebook
• Yahoo Buzz
• Twitter

• MORE

  • Add to my:

    • del.icio.us
    • Technorati
    • reddit
    • Google Bookmarks
    • Mixx
    • StumbleUpon

  • Blog this on:

    • TypePad
    • LiveJournal
    • Blogger
    • MySpace