The Daily Interview: Are We or Aren't We Contemplating the 'R' Word?

These days, it seems that everyone's divided over whether the economy will pick up by the end of this year. A handful of economists are saying we may even be currently in a recession.

Jeffrey Frankel Economics professor Harvard University

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But the official arbiter of a recession call is the National Bureau of Economic Research, which recently issued a release saying that there is a "possibility that a recession began recently." To sift through the mixed messages and try to get to the bottom of the outlook for the economy, the Daily Interview turned to an economist who sits on a key committee at the bureau.

Jeffrey Frankel, an economics professor at the Kennedy School of Government at Harvard University, is a member of the recession-dating committee of the National Bureau of Economic Research. Frankel doesn't believe we are in, or are headed for, a recession because he is certain that the Federal Reserve's 275 basis points' worth of cuts this year will continue to bolster consumer spending and position the economy for GDP growth of 2.5% to 3%.

The bad news, however, is that Frankel says a full economic recovery might not begin until as late as two years from the date of the first rate cut, which would mean waiting until January, 2003.

TSC: You sit on the recession-dating committee of the National Bureau of Economic Research, which is considered the official arbiter of U.S. business cycles. Do you have any sense that we are in a recession?

Frankel: Obviously there have been clear signs of weakness in the economy but my own view, speaking as an individual, not for the committee, is that we are not in a recession. The economic growth rate since October is about 1%, and that is a sharp slowdown relative to the preceding four years when the average growth rate was 4.5%, but that 4.5% was rather astounding, and I think most of us thought at the time that it was unsustainable.

So, my view is that while a recession is not impossible, it's more likely that what is happening is simply a slowdown to a more sustainable rate of growth. I do not understand why last fall some people started talking about a recession. It seemed very much premature. Looking back a couple of years ago, when I sat on the president's Council of Economic Advisors and we were doing the annual forecasts in 1998 and 1999, we were forecasting a slowdown to around 2.5% growth.

What happened, instead, was that we stayed above 4% a little longer than we had expected and that caused us to slow down a little below that. So, I have not been one of the pessimists. I definitely think there is a danger of jumping the gun.

TSC: Yet the rate cuts don't seem to have improved the economy. When do you think they will finally improve economic conditions, and how will that be manifested?

Frankel: It takes a while for the easing of monetary policy, or the reduction in interest rates, to have an impact on economic activity. The old standard line was that it takes anywhere from six months to two years to have a real effect. I don't have any reason to think it will be different this time around.

I will mention that household spending has stayed pretty strong, if you consider how big the decline in stock market wealth and consumer confidence have been. Consumer spending is surprisingly strong, and lower interest rates have much to do with that.

TSC: Do you think the 25 basis-point cut the Fed made last week rather than the 50 basis-point cut some market watchers were hoping for, will make much of a difference?

Frankel: The difference is not that large quantitatively. I suppose the major difference is if the markets think that something less than a 50 basis-point cut would be a signal that the Fed is just about done with its interest-rate cuts. It's very hard to second-guess the Fed, even though I know the people.

My own view is that the 250 [total basis-point cuts] we have had already this year [prior to Wednesday's 25 basis-point cut] are already quite a large easing of monetary policy to take place in a six-month period, and it seems to me that the earlier cuts we have had might be sufficient to do the trick. But everybody else is thinking that there might be more, and I just don't know.

TSC: Do you have any sense of when the economy is going to pick up?

Frankel: If the alternative scenario is right and this is nothing more than the fact that the economy in 1998 and 1999 was producing above its potential at an unsustainably rapid rate, then I would expect a few more quarters of slow growth, but not necessarily negative growth, which is commonly an indicator of a recession. Perhaps a year from now we will return to 2.5% to 3% growth. It's unlikely we are going to get back above the 4% we experienced in the late '90s, so it is possible that people will continue to feel that this was a slowdown, or growth recession.

TSC: What economic indicators will the Fed be paying attention to in the months ahead?

Frankel: Of course, they'll be looking for signs of inflation, which will preclude them from any further cuts or worries of overdoing it. The biggest indicator that has not yet come in all that negative is the obvious one, which is GDP. And it gets a little less attention because we only get it on a quarterly basis, rather than a monthly basis. But a lot of the statistics we get in on a monthly basis have already been coming in fairly negative. It may be a bit obvious to say, but that's the big one.

The Fed, and Alan Greenspan in particular, actually pay attention to hundreds of individual indicators, of which no single one is key, but Greenspan is unique in that they all mean something to him and he looks at all of them.

It would be quite sensible if this period of easing and slowdown in the growth rate was accompanied by a depreciation of the dollar and stimulus to trade balance. It has not happened yet but is something I would look for.