T H E B E G U I L I N G R E C O V E R Y
-- Rajeev Dhawan
Director of the Robinson College of Business
Economic Forecasting Center
The National Bureau of Economic Research (NBER), a non-partisan think tank in Boston composed of economists with impeccable credentials, recently declared that the March 2001 recession was over in November 2001. The latest GDP report showed the economy grew at a better than expected 2.4 percent rate in the second quarter of 2003, with corporate investment showing signs of life. The unemployment rate also inched lower to 6.2 percent in July, and President Bush's second tax cut installment has begun to flow. All this has happened in a short time span since the battle phase of the Iraq war was declared over in May.
A natural question to ask now is, has the recovery, which was supposed to have officially begun in December 2001, finally found traction? The honest answer is that it will take some work to morph this ugly duckling of a recovery into a pretty swan of sustained growth by next spring.
I am calling the recovery ugly and lacking in traction. I then predicted a rebound by next spring, and ended the last paragraph by saying that we need to wait until 2004 to experience the recovery's full benefits. Is there a contradiction in my assertion and predictions? The answer you could have forecasted is no!
The recovery is ugly and has lacked momentum for one simple reason more than a million jobs have been lost in this 20-month recovery period. The jobless recovery following the 1990-1991 recession actually produced a million jobs 20 months after it ended in March 1991. It was called ³jobless² in comparison to recovery from the 1981-1982 recession, when six million jobs were produced in the same time frame!
The recovery is ugly and has lacked momentum for one simple reason - more than a million jobs have been lost in this 20-month recovery period.
The disparity between what Wall Street and corporate boardrooms see in income numbers to define growth, and what Main Street expects in terms of job growth, is huge. Part of the blame rests on the shoulders of productivity improvements, courtesy of the 1990's computer and web revolution. It also unwittingly falls on the corporate sector, which at present is caught in a vise of stagnant revenues and rising employee benefit costs. Their optimal strategy is to cut costs by delaying capital expenditures, which results in no new hiring and even layoffs, as automation and the unspecific nature in location of certain white collar jobs make them easier to substitute with a work force outside the country.
The beacon of hope is an area that has suffered the most in this recession investment spending. Investment spending has fallen by about 12 percent in this last recession and recovery period. In a typical recession, investment spending drops on average only
3 percent. This time a lot of ground needs to be made up. Is it possible? Yes, as inflation and interest rates are both low, expected to remain low, and once businesses feel confident by late fall, investment will start to pick up speed. By mid-2004, this cylinder of the economy will be running at good speed.
The forecast is a 2.2 percent real GDP growth for this year, with the second half growing at a respectable 2.9 percent rate. This is somewhat better than the 2.6 percent rate that the economy has grown on average in the last six quarters since the recession officially ended. However, this growth was sustained entirely by consumers with declining investments during this period of recovery. This rate is much lower than the lower bound of the economy's trend growth rate, pegged to be between 3.0 and 3.5 percent by economists. In 2004, when the investment cylinder is firing at full steam, the economy perks up to a 3.3 percent growth rate. The full benefits of the bounce-back in investment are felt in 2005 when the economy grows at an impressive 4.0 percent rate. This growth is now above the trend rate, and by invoking Okun's law, the unemployment rate - which was stagnant at 6.1 percent in 2003 and 2004 - is expected to drop to 5.8 percent in 2004. The recovery as defined and expected by Main Street finally takes hold then.
Top |
| 
