Economic Panel Says U.S. in Recession
Nov. 26, 2001 -- The U.S. economy hit a peak in March and has been in a recession since then, according to the National Bureau of Economic Research, a panel of economists considered to be the arbiters of the nation's boom and bust cycles.
The peak in March put an end to the economic expansion that began in March of 1991 and lasted exactly 10 years — the longest in the bureau's chronology. A peak marks the end of an expansion and the beginning of a recession.
The report did not specify when the recession would likely end, a point on which many economists disagree. But what is apparent is that the Sept. 11 attacks on the United States worsened the tone for the U.S. economy.
Unlike the oft-cited definition of a recession as two consecutive declines in real gross domestic product, the bureau, commonly known as the NBER, looks at various monthly indicators to determine whether or not the economy is in a downturn.
The bureau defines a recession as a significant decline in activity spread across the economy for more than a few months that can be seen in four indicators: industrial production, employment, real income and wholesale retail trade.
The NBER says it gives relatively little weight to GDP since it is only measured quarterly and is subject to continuing revisions that can often occur decades after the initial data is released. U.S. GDP declined at a 0.4 percent pace in the third quarter of this year.
Attacks Worsened Downturn
In a statement, the NBER said the attacks of Sept. 11 clearly deepened the economy's contraction and may have been an important factor in turning the economy's downturn into a full-blown recession.
"Prior to the arrival of the data for October 2001, the committee was not sure that the contraction met the criterion," the statement said. "With a cumulative decline in employment approaching 1 percent and the very large decline in industrial production, the committee has concluded that the criterion has been met now."
Indeed, unemployment has been a key factor that has led many economists to worry about the economy's health. The NBER considers employment the broadest monthly indicator in the entire economy.
Through October, the decline in employment has been similar to the average over the first seven months of recessions, said the NBER report. The cumulative decline in unemployment is now about 0.7 percent, about two-thirds of the total decline in the average recession. The latest unemployment report for October showed the rate ticking up to 5.4 percent.
"I don't think the worst is over," says Cary Leahey, senior economist at Deutsche Bank in New York. "We will still see employment declines going forward, but I think there is a sense in the marketplace and among a lot of forecasters that probably the worst drop in employment has probably behind us, with the terrible report for October."
End in Sight?
Of perhaps greater importance is when the recession is going to end. Though the NBER doesn't forecast a bottom for the current downturn, Jeffrey Frankel, economist at the Kennedy School of Government at Harvard University and a member of the NBER's business cycle dating committee, says the recession could likely last into next year.
"I think that the standard forecasts that people are making, that will see the recovery in the year 2002, are correct," says Frankel.
Others, including Treasury Secretary Paul O'Neill, are more optimistic. O'Neill said yesterday that he expects the economy to recover early next year, citing an increase in retail sales this year on the Friday after Thanksgiving, the biggest shopping day of the year.
"The numbers that I saw this morning indicated holiday sales on Friday were four percent over a year ago," O'Neill told ABC's This Week. "That doesn't sound to me like a weak consumer."
But others note that the stronger-than-expected retail sales came at a cost to stores. Many retailers are offering deeper discounts this year to entice consumers to come out and spend, and that discounting will likely eat into profits.
"As a result, firms' abilities to expand, to carry inventories and to put people back to work is not going to be what it would have been if the firms had been able to make these sales at normal prices," notes Harvard University economics professor Benjamin Friedman.
Boost for Stimulus
Sung Won Sohn, chief economist at Wells Fargo Bank says he believes the economy has already started rebounding since September. He has revised his fourth quarter GDP estimate upward to -1 percent from -3 percent he originally forecasted, based on strong consumer spending. Though that would technically mean a recession in some economists' definition of the term, Sohn says he agrees with the more broad-based criterion of a recession used by the NBER.
Two quarters of GDP decline is "a rule of thumb which may or may not work," says Sohn. "In 1980, we had a recession, but the economy contracted only one quarter."
One thing is for certain — this latest spurt of bad news for the economy will increase pressure on congress to pass a stimulus package. President Bush has again called on the Senate to agree with the House on billions of dollars for workers who lost their jobs and for tax breaks by Christmas.
"I am obviously aware that our economy is slow and we will do everything we can to enhance recovery," President Bush said today during a White House ceremony welcoming home the two U.S. aid workers that were held captive in Afganistan.