Recession Not Acting Its Age

The unusual strength in personal income has some economists worried.
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A private panel's tracing of the current economic contraction to March suggests the worst might be over for the economy. Another way of reading it is that the worst has just begun.

The announcement Monday by the National Bureau of Economic Research was welcomed in some circles because it put the downturn's age at about eight months, just three months shy of the average recession's lifespan over the past 50 years.

But aspects of this contraction have been anything but average, especially personal income, which has yet to show the decline characteristic of previous recessions. In addition, the economy's malaise has been confined primarily to industry, not consumers. If the consumer buckles, economists say the downturn could be much more protracted.

"It was a difficult judgment call," said Jim Stock, an economist at Harvard's Kennedy School of Government. "You could make a case that a recession started earlier because of production, but on the other hand, personal income hasn't even declined."

Charting the Fall

The NBER characterizes a recession as a significant decline in industrial production, employment, real income, and wholesale-retail trade. Although economists typically define a recession as two quarters of negative growth, the NBER prefers to use monthly indicators, which are subject to less revision.

According to the panel, employment reached a peak in March 2001 and has since declined. In fact, the cumulative decline is now about 0.7% compared with about 1.1% for the average recession.

Meanwhile, industrial production topped out in September 2000 and declined over the next 12 months by close to 6%, surpassing the average decline in earlier recessions of 4.6%. Real manufacturing and trade sales reached a peak almost a year ago.

But while the rate of real personal income growth has slowed somewhat, the panel said there was no sign of a decline through September 2001. Among the four indicators, this is the one that has behaved differently from prior recessions.

Next Shoe?

Economists believe the biggest risk to the economy at this point is a serious retrenchment in consumer activity, triggered by large job losses. Incentives like zero-percent financing have so far propped up retail sales, but some argue that it cannot continue for long.

"Retail sales snapped back in October but only because September was so bad," said Maury Harris, an economist at UBS Warburg. "When you average the two together, they're still below August levels. Mall traffic is down and we're still getting very mixed messages."

James Blumenthal, an economist at MCM Moneywatch, believes this recession could well last longer than the historical precedent because Sept. 11 added "considerable uncertainty."

"There's no guarantee we'll follow the usual pattern because we're in uncharted territory," he said.

Pushing the historical envelope is industrial production, which plunged 1.1% in October, the 13th straight month of declines.

"The fact that the recession started in March should have no effect on when it ends or how long it lasts," according to Joe Liro, chief economist at Stone & McCarthy. "We need to see a turnaround in some of the things that were used in setting the start date, such as industrial production."

Harris said although the average recession has lasted just 11 months, "this is a very different kind of recession," in that it has been led by the business sector not the consumer.

Bottom Calls

Still, many remain convinced that no doomsday scenario is in the making. Jim Bianco, president of Bianco Research, said the panel's declaration Monday has given him confidence that a recession has either ended or is "very close to ending."

"We have two other instances in the past where the announcement was made right about the time recessions were ending," he said. "In 1991, the bureau declared a recession one month after it had ended, while in 1980, a recession was declared one month before the trough." Still, he added that in 1982, the recession continued for another 11 months after the NBER made its call.

Jeff Hall, economist at IFR Financial, pointed to recent data as a sign that the economy is turning around. The Michigan consumer sentiment index improved in November while the expectations index, which offers clues about future spending patterns, also advanced. Meanwhile, the number of U.S. workers filing for unemployment benefits declined for a fourth straight week to a two-month low of 427,000, according to the Labor Department last Wednesday.

Increased governmental urgency in the face of a worsening economic situation could also offset some of the negative momentum. President Bush said Monday's announcement made it more critical for the Senate to pass a $75 billion economic stimulus package.

"We expect massive monetary and fiscal policy will lead to 5% growth in the second half of 2002," said George Cohen, economist at Merrill Lynch.