The Clinton Legacy:
YES, IT'S A RECESSION
Tuesday,March 20,2001
By ALAN REYNOLDS
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SORRY, folks: Denying the facts won't change them.
There sure is plenty of denial, though. Senate Minority Leader Tom Daschle insists our economic troubles are purely rhetorical, caused by Bush administration officials who mentioned the dreaded "R" word (recession). "The more they use the 'R' word," says Sen. Daschle, "the more trouble we're going to be in." House Minority Leader Richard Gephardt said "Recession is looming" on Jan. 3 - but now he finds it "irresponsible" for others to wonder if "looming" has become blooming.
On a happier note, The New York Times recently reported "agreement" among forecasters that "consumer confidence and spending have been sufficient to ward off recession."
Problem is, forecasters always shun the R-word until long after the economy has been shrinking for months. On the eve of the last recession, July 10, 1990, Bob Hershey of The New York Times reviewed the shaky record of blue-chip forecasters. Although they had been predicting "a recession just over the horizon" for six years, Hershey noted, in July 1990 the blue chippers became newly confident of a soft landing - just as the economy began to tank.
Sure, Fed Chairman Alan Greenspan has been relatively cheerful lately - but no more so than last time around. Testifying before the Joint Economic Committee on Sept. 19, 1990, Greenspan said, "The probability of a recession developing in the next six months . . . has declined to about 20 percent." Oops.
On Jan. 10, The Financial Times wrote that I was "the first prominent economist to publicly declare a recession (he thinks it started in October)." Some doubted I was first; many doubted I was prominent - but everyone doubted I was right. To admit the economy started shrinking in October, after all, means we are now in the sixth month of a recession. Is that possible?
To determine when this recession began, experts at the National Bureau of Economic Research will eventually pour over various "coincident" indicators that neither lead nor lag the economy's ups and downs:
* The most important of these is industrial production. It peaked last September and has fallen every month since then.
* Also vital: Real, inflation-adjusted retail sales. They've fallen in four of the past five months.
* Other important indicators include orders for nondefense durable goods, real disposable income and employment in manufacturing. Every one of 'em peaked last June.
What about overall unemployment, you ask? It's a lagging indicator of recession: Most employers first cut back on hours (as they're doing now) before resorting to mass layoffs (as many are starting to do). Manufacturing is always first to lose jobs - and lately it's been doing so at a rate of about 100,000 per month.
To describe all these falling numbers as a "slowdown" has required considerable creativity:
* Some say we could not have been in recession until January (if then) because gross domestic product rose by 1.1 percent in the fourth quarter. Sorry: Real GDP rose at a 5 percent rate in the third quarter of 1981 and at a 1.8 percent rate in the second quarter of 1982, but the economy was in recession the whole time.
* When a survey of the National Association of Purchasing Managers came in at 42.9 for February, up from 42.3 in the previous month, the initial rosy spin was to see this as evidence the downturn is "bottoming out." Actually, it was just early evidence that industrial production fell again in February.
* Some were saying the January industrial-production number would not look so bad if you left out autos and energy. Then the figures were revised to show a drop twice as deep as previously reported. And production fell just as rapidly in February - at an annual rate of more than 7 percent - even though the auto sector stabilized.
* Before the February drop in retail sales, Greenspan had likewise been prematurely upbeat about consumer spending. His fellow optimists now ask us to ignore the drop in real retail sales from September to December, and to average the February decline against January's rise. But the apparent rise in January is largely illusory. Sales always implode after Christmas; a dubious "seasonal adjustment" converted that into a statistical increase. Note, too, that energy prices also exploded in January, a rise that showed up as larger sales, but in fact was mainly higher prices.
* Other seized on a consumer-confidence survey from early March ticked up a bit (after falling like stone previously). But that was before stock prices took the worst weekly tumble since the 1990 recession. Stock prices predict consumer confidence very well, so retail sales for March will surely be terrible.
In any case, consumer spending is far from the best sign of things to come. Although it's two-thirds of the economy, it's also the most stable part. Business investment is a far more revealing indicator of coming economic swings, at least initially.
And, unfortunately, Fortune magazine's index of business confidence is back to recession levels. Profits have been squeezed by high energy costs and high interest expenses, and that forces cutbacks in investments and inventories, then in hours, then in jobs.
Sen. Daschle and Rep. Gephardt might actually believe that a little cheerful chatter could fix all this. Talk is cheap, and do-nothing politicians are looking for a bargain. But it would be far more effective to push for substantially lower interest rates and for immediately lower tax rates.
It's the economy, stupid, and legislators who don't get it will not deserve our votes at the next election.
Alan Reynolds is director of economic research at the Hudson Institute.
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