Jewish World Review April 30, 2002 /18 Iyar, 5762
http://www.NewsAndOpinion.com | Surprise, surprise-and surprise again. That's the story of the American economy. Who wasn't utterly astonished by the astounding boom of the 1990s? It was the longest economic expansion in our history with the highest level of growth and booms in capital spending, the stock market, productivity, and employment, all accompanied not by the familiar bogeyman of accelerating inflation but by its decline. And who wasn't poleaxed by the swiftness of its reversal, triggered by the seemingly overnight collapse of capital spending? Absent the impetus of a collapse in consumer spending, it was the first time in a century that America had seen anything like it.
What happened? Oh, just a few things. CEOs, it seems, were stunned when the bubble of expected profits burst, taking their biggest tumble in 50 years. Investors were likewise jolted by a stock market crash that inflicted a mere $5 trillion hit in values.
Most of us braced for more and worse. What we got, happily, was less and better. Virtually no one saw that the recession would last a measly three months. That's the shortest downturn since World War II, and it was accompanied by just a modest rise in unemployment, peaking, so far, at just under 6 percent. That's well below past recession highs like the 10.8 percent jobless rate in the 1981-82 downturn. The surprise-a nice one, this time-was the consumer boom, particularly in housing and autos. It kept the economy chugging along despite the series of shocks culminating in the worst assault on America's psyche since Pearl Harbor, to wit, September 11. Nobody fully appreciated the effect of the increases in wages, real-estate values, and stocks before the downturn. Since 1996, those increases made American households 20 percent richer on average. On top of that, we have last year's lower mortgage rates, lower energy costs, tax cuts, home refinancings, and retailer discounts. Foul weather or fair, Americans just couldn't resist the bargains.
Eye on the prize. Perhaps most astonishing has been productivity. It was up over 5 percent in last year's fourth quarter and about 6 percent in this year's first quarter, compared with declines in the last three recessions. In fact, since the official start of the recession, in March of last year, productivity has been growing at an annual rate of 2.7 percent compared with the previous 50 years, which experienced declines on average during downturns of 0.6 percent. Reduced labor costs allowed many companies to respond to falling demand without the usual unpleasantness of mass layoffs. A new phenomenon-temps, who now make up 2 percent of the workforce-accounted for 30 percent of the resulting unemployment. There is also an untold story of managerial triumph: Managers made good use of new technology, using real-time information provided by systematized and computerized order tracking and inventory control to accelerate revisions in production schedules, work shifts, and capital and marketing budgets to meet reduced demands.
The prize for the quickest reflexes should go to the Federal Reserve Board. The only central bank in the world able and willing to react with such alacrity, the Fed literally began cutting interest rates before the recession officially began, maybe for the first time in the history of monetary policy anywhere. Now it's much less likely the Fed board will raise rates anytime soon or boost them very much. With little inflation, Fed Chairman Alan Greenspan has indicated that he is committed to a policy of waiting for a sustained, solid expansion.
So with the economy growing much faster this year than anyone expected, can we project where we're going? Not quite. People who write about the economy are a lot more optimistic about it than the people who write the checks. Business is worried that the economy's strength is due to a one-time shot in the arm provided by inventory rebuilding. That won't carry us through the second half of the year, and the consumer is already overspent on housing and autos. With so much debt and so little savings, consumers have little capacity for a fresh burst in spending.
The key to sustaining the recovery, of course, is capital spending. But
with corporate debt at a record high, most companies just won't spend
on capital or large-scale hirings until they see a restoration of their
bottom line. And that means profits. Yes, it may have been a mercifully
brief recession, but profits plunged 28 percent over its course. Most
companies feel they have little pricing power to lift profits. Another note
of caution lies in the dramatic contraction of business advertising in
major business pub- lications like Forbes, Fortune, Business Week,
and the Wall Street Journal, which has dropped over 50 percent over the
past 18 months. So, going forward, as they say, the only surprising
thing will be if we are confronted with no new
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