What Will Pull the Economy's Socks Up?
N E W Y O R K, Oct. 31, 2001 -- It's official: the U.S. economy is in reverse.
For the first time in more than eight years, the economy backed up in the third quarter, contracting at a 0.4 percent pace. It was the biggest quarterly contraction since the beginning of 1991 when the U.S. economy was in the throes of its last recession. The economy also back-pedaled briefly in the first quarter of 1993.
And according to forecasts, it isn't expected to move forward in the fourth quarter, effectively ending the longest economic expansion in the country's history.
So what sector will jumpstart the U.S. economy and get it moving again? Will it once again be technology, where routers and drivers and broadband stuff take off? Will it be consumer goods and services, where demand for PCs and Gap denim picks up again? Perhaps defense stocks? Financials? Information technology?
Not exactly.
"The real driver will be psychology," said Barry Hyman, chief market strategist with Ehrenkrantz King Nussbaum. "There are a number of different sectors that stand to benefit from low rates and tax breaks but what you really need to see is a rebound in confidence on both the consumer and corporate side."
Bush Urges For Stimulus
While almost all economists are expecting recession in the short-term, they are also anticipating a sharp turnaround next year. A massive stimulus package from the government and near record-low interest rates from the Federal Reserve should foster an economic recovery sooner rather than later, they say.
"The Congress needs to pass a stimulus package and get it to my desk before the end of November," President Bush told the National Association of Manufacturers today. "My call to Congress is, get to work and get something done. Time is of the essence. I hope the bill writers get moving. That is what the American people expect."
Bush also said today's third-quarter GDP report confirmed "that the events of Sept. 11 have really shocked the nation."
But the president, along with many economists, suggests that what may reverse that shock is good ol' human nature, which more so than in previous times of economic uncertainty will be the cart that pulls the economic horse back onto the road.
A Different Kind of Economy
Before Sept. 11, it was American companies scaling back on technology and infrastructure spending that led to weaker economic growth. With the stock market plunging, capital to buy new equipment, enhance assembly lines and do other infrastructure improvements dried up at the same time that costs were rising.
What economy watchers had been focusing intently on was the consumer. Despite countless corporate casualties, a stock market swoon and hundreds of thousands of layoffs, consumer confidence continued to hold up, giving analysts and economists hope that a recession could be avoided.
And then came Sept. 11, when the U.S. found itself immersed in something unprecedented: vulnerability. That insecurity, along with uncertainty of what may come next has prompted companies and individuals to be much more cautious. Senior officials once again warned the nation Monday to be on high alert for a new terrorist attack that could come this week.
"It created a 'bunker mentality' among consumers, who are more centered around the home, shopping less often, and spending less freely," said Daniel Barry, a market analyst with Merrill Lynch.
Consumers Holding the Bag
A bunker mentality, maybe. Even so, today's GDP report did show consumers are still holding up the economy on their shoulders. The overall decline in growth was caused by an 11.9 percent drop in business spending, while a modest 1.2 percent increase in consumer spending from July through September helped keep overall growth from falling further.
As previous recessions drew to a close, certain industries led the turnaround. In the recession of 1990-1991, for instance, it was financials and consumer products that were among the first to benefit from consumers and businesses stepping back up to the plate after the Gulf War and the savings and loan banking crisis.
The '90s ushered in a much different kind of economy — one that continued to grow much farther and faster without the usual signs of a boom and bust cycle. When the bust finally happened, it created general uncertainty. When Sept. 11 happened, it made that uncertainty even more prevalent.
"I think the biggest barrier here is sentiment," said Warren Bailey, an economics professor at Cornell University. "People are trying to weigh their decisions based on new uncertainties, both economic and otherwise."
To be sure, economists are confident that consumers and businesses will get their convictions back and begin taking risks again, even if the war on terror drags on. And with companies already having cut costs, fired staff and forgone technology and infrastructure upgrade plans, getting back to that stage shouldn't take as long as it might have in the past.
Some Ugly Numbers
Still, there will be very little evidence of an economic recovery in the short term. Most economists are bracing for some ugly numbers in the wake of Sept. 11, and most are anticipating negative growth in the fourth quarter, which would officially send the U.S. economy into its first recession since 1991.
"Optimism and the willingness to take risks are the two greatest assets of the U.S. economy, and right now neither of those assets are very prominent," said Stephen Slifer, chief economist with Lehman Brothers.
All the same, most are confident of a turnaround by the second half of 2002 — so long as people and companies can regain their shattered confidence.
"People have to remember that economics is a social science, it's about human behavior," noted Bailey. "We have millions of amounts of data to draw on rather than just sitting around with notepads watching people twitch, but that doesn't change the fact that sentiment is a big part of how the economy operates."