NYT: Too late to stop a recession?
nytimes.com
News Analysis: Just in Time, or Too Late?
NEWS ANALYSIS By DAVID LEONHARDT
Ozier Muhammad/ The New York Times
Neal Soss of Credit Suisse First Boston is an optimist, seeing only "a classic inventory cycle."
Times Reporter Jonathan Fuerbringer on the Fed and the Markets
he Federal Reserve made another assault yesterday in a war it has already lost, suggested a pessimistic group of economists who feel a recession is inevitable this year — if one is not already under way.
By lowering interest rates for the fourth time in less than four months, Alan Greenspan and his colleagues have made it less expensive for businesses to invest in new equipment and for consumers to buy cars and houses.
But it may not be enough to end the thousands of job cuts that companies are making, and it will not persuade businesses, many of which spent too much money during the bull market of the 1990's, to buy more equipment when they already own too much.
That is what worries those economists who shrug off yesterday's 399- point gain in the Dow Jones industrial average and remain at odds with the widespread belief that lower rates will spur consumer spending and quickly revive corporate profits.
Stocks may rise spectacularly after interest rate cuts, but lower borrowing costs have always needed months, or even a year, to affect people's decisions about most big purchases. Because of this delay, these economists say, the economy will continue to become weaker before it can recover.
In the process, the longest economic expansion in American history would end.
"It is too late to prevent a recession," said Anirvan Banerji, the director of research at the Economic Cycle Research Institute in New York. "The process that leads to job losses is already in motion."
Thirty-eight percent of the economists surveyed recently by Blue Chip Economic Indicators, a newsletter based in Alexandria, Va., said they expected a recession in the coming year. Mr. Banerji and other analysts who follow leading economic indicators, like new factory orders and the number of people applying for unemployment benefits, say that such numbers, taken together, have never reached their current levels without a recession following.
Optimists counter that unusually low inflation has given the Fed great flexibility to reduce interest rates without worrying that consumers and businesses would then embark on a spending binge that would cause prices to spiral upward.
With interest rates falling, most economists say, consumers will buy houses, cars and other goods at a healthy pace, as they have continued to do for most of the last year. Businesses, for their part, will become more willing to invest in new equipment and to hire new workers as they try to sell the products now lingering on warehouse shelves.
"This is a classic inventory cycle," said Neal M. Soss, an economist at Credit Suisse First Boston, who believes the economy will grow by about 1 percent in the first half of the year and about 3 percent in the second half. The main difference in this slowdown from previous ones, Dr. Soss added, is that businesses and the Fed have both reacted more quickly, ensuring a sharper but shorter adjustment period.
Many economists define a recession as two consecutive quarters of shrinking economic output by the nation as a whole. The National Bureau of Economic Research, a group of academics considered to be the official arbiter of business cycles, is less specific, but it says most recessions last six months to a year.
The debate is more than a semantic one because an actual recession would almost surely cause significantly more job losses and stock market declines than a slowdown would. The last slowdown occurred in the mid-1990's; the last recession lasted less than a year and ended in March 1991.
A similar version of the economists' debate is also playing out across the country — albeit less explicitly — as people decide whether to sell some of their stocks, buy a new house or commit to a summer vacation. They will ultimately affect the debate's outcome, too.
So far, Americans have reflected the divide among economists by saying one thing and doing another. People have become far less confident about the economy since late last year, according to polls, but they have continued to buy goods at a fairly brisk pace in the first three months of 2001. Even as the stock market has fallen, consumers have taken on more debt.
This must change soon, economists agree. Either confidence will begin to recover or spending will start falling.
The pessimists think the adjustment has already begun. In March, as the unemployment rate rose to 4.3 percent and the economy lost the highest number of jobs in a single month since 1991, retail sales fell slightly. During the early weeks of this month, initial unemployment claims increased to their highest level in five years.
Few analysts expect the unemployment rate to fall soon. This year, Cisco Systems, Eastman Kodak and dozens of other companies have announced layoffs, most of which are taking effect over weeks or months. Altogether, employment statistics that suggest future trends — like the number of hours worked and other measures — have dropped to their lowest level in 19 years, according to the Economic Cycle Research Institute.
Despite the increased popularity of investing in stocks, relatively few Americans rely on them for a significant portion of their income. Widespread job cuts, on the other hand, are almost guaranteed to crimp consumer spending, one of the few strengths of the American economy so far this year.
With layoffs already under way, the economy is doomed to weaken further, say those who believe a recession to be unavoidable.
"Ultimately, the Fed will win" and turn the economy around, said Robert J. Barbera, the chief economist of Hoening & Company, a brokerage firm in Rye Brook, N.Y., who thinks a recession started late last year. But, he added, the Fed is more likely to start winning in July than to start winning now.
Behind some of the concern is the technology boom of the late 1990's. Eager investors encouraged companies to spend billions of dollars on new computer and telecommunications equipment. Largely as a result, productivity — what one worker can produce in one hour — surged.
But many companies now find themselves with more equipment than they can profitably use. Unlike extra cars sitting in a dealer's lots, the excess capacity cannot easily be sold off at a discount because the executives never intended to sell it in the first place, said John H. Makin, an economist at the American Enterprise Institute.
"It has all the classic elements of an overinvestment bubble," Mr. Makin said, adding that companies are unlikely to reverse course the next few months.
The optimists, on the other hand, believe the excess of technology equipment is simply a normal, if somewhat severe, build-up.
Inventories in the auto industry and other old-line businesses have started to fall recently, according to Economy.com, a consulting firm in West Chester, Pa. Technology inventories will soon follow, said Dr. Soss of Credit Suisse First Boston.
Companies like Cisco, Intel and Oracle have badly missed their sales estimates not because technology investment is entering a weak era but because managers now have better information about their businesses and can delay orders more quickly than in the past, say the economists who see the expansion continuing.
With inventories shrinking, the Fed cutting rates quickly and Congress moving to cut taxes, economic statistics will soon improve, the optimists add.
Wall Street seems to have come down strongly on this side. Stocks typically start rising a few months before the end of a slowdown, and many investors believe the economy is recovering.
Consider Cisco, the large maker of Internet equipment. After the market closed on Monday, the company said its sales for the three months ending April 30 would fall 30 percent compared with the previous quarter, a notable change from its recent growth rates. "This may be the fastest any industry our size has ever decelerated," said John Chambers, Cisco's chief executive.
On Tuesday, however, its stock fell only 54 cents, or 3 percent, to $16.66, from $17.20. By the end of yesterday's Fed-induced rally, Cisco shares were back to $18.
Worried economists may think one thing. But the message from investors could not have been clearer: they seem to think the worst is over.
In fact, by cutting rates yesterday, the Fed acted just as many investors were beginning to become optimistic. It also removed any doubt that Fed officials count themselves among those who believe that a recession is neither necessary to rid the economy of its imbalances nor unavoidable.
"They're going to be very aggressive," said Mark Zandi, the chief economist of Economy.com.
A recession, he added, "is not inevitable, but they've got a tough battle." |
