... if this idiot is all the bulls have going for them these days, look out below ...
August 30, 2001,New York Times, Maybe We've Just About Hit Bottom
by Ian C. Shepherdson
Alhalla, N.Y. -- The economic news this month looks bad enough to turn even an inveterate optimist into a pessimist. Gateway announced that it would lay off one-quarter of its work force, Lucent told 2,200 workers in the United States that they would lose their jobs, and at least 21 dot-coms shut their doors for good.
If this unpleasant news continues over the next few months, driving up the unemployment rate, many say that there will be a further slowdown in consumer spending (by far the biggest component of the American economy). But this is not necessarily true. Although the future might seem grim for the newly unemployed, what is true of individuals is not necessarily true of the economy as a whole.
Yes, unemployment, which had been at a 31-year low of 3.9 percent, has been climbing since late last year. It now stands at 4.5 percent and will probably rise further. But this figure doesn't tell us that much. Rising unemployment is a consequence, not a cause, of an economic slowdown. For instance, the economy began to recover from recession in the second quarter of 1991, but unemployment continued to rise until mid-1992.
There are signs that we are at a similar point now — at or approaching the bottom of the economic cycle. In polls taken over the past few months by the Conference Board, respondents have become more gloomy about the current state of the economy, but they have become more optimistic about the future. The number of people expecting the employment picture to brighten over the next six months has also risen.
For most people, the important economic story of the moment is probably not the rising unemployment rate. Instead, most may be focusing on the stock market, which is volatile but not plunging, and they may be expecting the actions of the Federal Reserve, which has been cutting interest rates aggressively, to turn the economy around. Tax rebates have also probably lifted expectations.
Those of a gloomy disposition often argue that people are carrying much more debt than ever before, which might slow growth in consumer spending as unemployment rises. But consumer debt is only half the story. Consumers' debt has risen by nearly $4 trillion over the past 10 years, but their assets — even after the plunge in the Nasdaq — have risen by more than $20 trillion. Overwhelmed by debt? It doesn't look that way to the dispassionate eye.
Pessimists also claim that recovery will be delayed because the Fed's reductions in short-term interest rates have not been followed by significant declines in long-term rates, which affect mortgages and borrowing costs for companies. But the markets anticipated the economic slowdown well before the Fed did and drove these rates down in advance of the Fed's actions. The average 30-year mortgage rate, for example, is now just under 7 percent. This is only a quarter-point or so lower than when the Fed first cut rates in January, but it is more than a full point lower than the rate a year ago. No wonder the housing market is so strong.
Meanwhile, in the industrial sector, unwanted inventory — everything from shoes to refrigerators to raw materials — is now disappearing fast. Over the past six months, companies have reduced their stocks of durable goods like computers and cars at a very rapid 7.7 percent annualized rate, and they now hold less inventory than they did a year ago. In the past, inventory reductions at this pace have always signaled strong rebounds in production within a few months.
This will do little immediately to address the other problem facing manufacturers, particularly in the technology sector — what to do with the now-idle factories and equipment they bought in the late 1990's. These investments helped drive economic growth to an average of 4.2 percent between 1997 and 2000, but as the past year has clearly shown, growth at that pace cannot be maintained for long.
A return to growth of about 3 percent would be great news by all but the crazy standards of the dot-com boom, and it is within reach — rising unemployment or not.
Ian C. Shepherdson is the chief American economist at High Frequency Economics, an independent research company.
Copyright 2001 The New York Times Company
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