>>Market Place: Fed Credits a New Economy With Altering Old Patterns
By DAVID LEONHARDT
bout 2 o'clock this afternoon, the 17 members of the Federal Reserve's Open Market Committee will file into their
second-floor boardroom on Constitution Avenue in Washington, find the large chairs with the brass plates bearing
their names and sit down optimistic that the economy is about to improve.
It will have to defy history for them to be correct.
For the last 30 years, each time that the nation's payrolls have shrunk as much as they have recently, they have continued
falling for months and a recession has ensued or has already been under way. Over an even longer period, the same is true
of a broad measure of the value of goods that the nation's companies are selling and of a broad measure of the amount that
manufacturers are producing.
These are not merely a few statistics among many. They form the core of the definition of a recession given by the National
Bureau of Economic Research, a group of academics widely considered to be the official referee of economic cycles. Last
week, the group released a statement saying that there is now "the possibility that a recession began recently."
More important than what the statistics mean for an academic definition, they suggest that the worst of the economic
downturn may not yet be over. In the past, when the economy weakened as it has this year, it has ignited a vicious cycle of
layoffs, sluggish consumer spending and yet more layoffs that took almost a year to end.
"It's very likely that we are in a recession now" and recessions typically last about 10 months, said Lakshman Achuthan, the
managing director of the Economic Cycle Research Institute in New York. "They snowball."
But Alan Greenspan, his colleagues at the Fed and nearly all Wall Street economists think that the $10 trillion American
economy can be turned around more quickly than ever before. The credit, they say, belongs to a "new economy" that has
survived the bursting of the dot-com bubble and is altering decades-old economic patterns.
"Is there a new economy?" Laurence H. Meyer, one of the Fed's governors, asked in a speech earlier this month. In the
United States, "the answer, I believe, is yes, we are in a new economy."
The technological innovations of recent years have allowed the average worker to produce more goods in an hour, most
economists say. This has kept inflation low because companies do not have to raise prices — even as the long expansion
has caused wages to rise — to increase their profits. With inflation low, the Fed could reduce interest rates more
aggressively than it had at the start of other slowdowns, when it was concerned that the stimulus would send inflation to
unacceptable levels.
Since January, the Fed has cut interest rates five times, and it is expected to do so again at the two- day meeting that starts
today. If it makes a one-quarter-point cut — and a growing group of analysts is predicting a half-point reduction instead —
the Fed will have lowered rates by 2.75 percentage points in less than six months. During the last recession, in 1990-91, it
took more than a year to do so.
Technology also enabled many businesses, like automakers, to notice the slowdown almost as soon as it started late last
year. The companies then decreased their production sharply, sold some of their bulging inventories and are now in better
shape than they were at a similar point in earlier downturns, according to the consensus.
On average, analysts are predicting that the economy will hit a nadir in the current quarter, growing just 1 percent, slightly
less than it did during the end of 2000 and the first three months of this year, according to Blue Chip Economic Indicators, a
newsletter based in Kansas City, Mo. In the final six months of this year — with inventories shrinking, tax rebate checks
going out in the mail and lower interest rates encouraging consumers and businesses to spend money — growth will
accelerate to about 2.5 percent, according to this forecast.
In speeches around the country in the last two months, Mr. Greenspan, who is the Fed's chairman, and other members of
the rate-setting committee have offered a similar if less specific analysis. "Looking forward, I'd say the U.S. economy still
has a lot going for it, and that we're likely to see an acceleration in growth by the end of the year," Robert T. Parry, the
president of the Federal Reserve Bank of San Francisco, said earlier this month.
Late last month, in language typical for him, Mr. Greenspan said that the Fed's "front-loaded policy actions this year should
be providing substantial support for a strengthening of economic activity later this year."
If so, it would be an occurrence extremely rare in the last 50 years. Since World War II, manufacturing- and-trade sales —
the measure of goods sold — have fallen at least 1.8 percent, as they have in recent months, on 10 other occasions,
according to the Economic Cycle Research Institute. Each time in the past, the measure continued falling by at least two
more percentage points, and with the single exception of the early 1950's and the Korean War, a recession ensued.
Of the 20 times that employment has declined by at least as much as it has recently, a recession has followed (or had
recently ended) 17 times, and all three exceptions happened before 1969. Industrial production — the measure of
manufacturing output — has a perfect record of predicting recessions since World War II.
The fourth variable in the official definition of recession — in addition to employment, output and sales — is income, but it
frequently continues to rise even during recessions, Mr. Achuthan said.
Some of the optimists say that the historical strength of the economy, relative to almost every other period besides last year,
will be the difference. With unemployment still low, consumers have continued to buy everything from clothing to houses at
a fairly brisk pace.
"You have to be careful with growth rates; they can be misleading," Arthur J. Rolnick, the director of research at the
Federal Reserve Bank of Minneapolis, said. "We're still really well off."
Even if unemployment rises this summer, weakening consumer spending, the interest rate cuts and tax rebates will keep the
economy from recession, the optimists say.
But none of this is an exact science, Mr. Rolnick said. The chances that the consensus will be wrong, and the economy will
indeed worsen in the coming months, are about "30 to 40 percent," he added.<<
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