Recession seen as painful cure for excesses of dot-com era
BY DAVID A. SYLVESTER
Mercury News
For most of this year, the big economic debate was whether the United States would follow Silicon Valley and fall into a recession.
The debate just ended. With the sharp drop in the stock market during the week after the Sept. 11 terrorist attacks, economists largely agree that the national economy has stopped growing and will enter a recession.
Now the question becomes: How long and how deep?
The answer: as long as it takes to correct the excesses of the 1990s, the longest expansion in U.S. history.
The national recession of 2001 is the first to be led by the nation's technology industries. Silicon Valley and its tech industries were the prime beneficiaries of the 1990s economic boom -- especially during the dot-com and telecommunications craze of 1999-2000. Afterward, the valley began suffering before the rest of the nation, and now it's expected to suffer longer.
Recessions are like a bad headache the morning after a wild party. But some economists say recessions play a vital role in the economy: They straighten out excesses such as dot-com craziness or inflated oil prices. They're painful, especially for employees who are laid off, but necessary for long-term growth.
And generally, they're short. Since 1950, the average recession has lasted 11 months, while the average period of growth between recessions was 52 months.
In Silicon Valley, recessions don't always track the national economy. And optimists say that recessions in Silicon Valley have sparked remarkable innovations that have led to the region's astounding growth.
But before it's over, the recession of 2001 will most likely result in even more layoffs, require hundreds of companies to either merge or file for bankruptcy and cause debt-heavy consumers to cut back on spending. Nationally, the trade deficit will fall, and the government will return to deficit spending.
No checks, balances
``Trying to have an expansion without a recession means there are no checks and balances on leverage and debt, and the economy can run wild,'' says Jim Stack, president of the stock market research firm InvestTech in Montana.
Don't blame the terrorist attacks alone for what's happening now, say several economists.
The economic cost of the terrorist attack has been estimated at anywhere from $17 billion to $70 billion. At the low range, that cost is similar to the damage from the Northridge earthquake in Los Angeles in 1994; at the high range, it would be about twice the impact of Hurricane Andrew in Florida in 1992. According to the UCLA Anderson Forecast, previous disasters hurt their states only for three months.
In the same way, the loss of the World Trade Center, the four airplanes and lost profits in the airline industry might hurt the economy only temporarily, said Christopher Thornberg, senior economist at the UCLA Anderson Forecast. Much of the lost production during the week of the attacks, such as in the securities industry, was recouped last week.
``Economies rebound remarkably rapidly from these sorts of disasters,'' he said.
A recession is often defined as six months of shrinking gross domestic product, the measure of all the goods and services produced within the United States. But a more accurate definition is ``a substantial decline in output and employment,'' according to the National Bureau of Economic Research, the organization that dates recessions.
Alternative measure
The bureau measures recessions not by the quarterly GDP figures, but by four monthly indicators: industrial production, employment, real personal income and overall sales. Three of these four indicators began declining either late last year or early this year, with real income the only one still steady.
Steven Milunovich, technology strategist at Merrill Lynch, thinks Silicon Valley's recession started this spring and expects the valley won't recover before the national economy. Heavy investing in new technology companies led to a run-up in stock prices, but when the companies failed to turn profits, the so-called bubble burst and stock prices plummeted.
``When you have a bubble, typically it's not the same sector that is going to lead you out,'' he said.
For next year at least, he expects more consolidation among tech companies and more pressure for tech firms to cut prices.
Nationally, the statistics have turned bleak. The Dow Jones industrial average gained 1.9 percent Friday, for a total gain of 7.4 percent for the week. But that gain erases less than half the loss recorded by the stock market in the previous week, after trading resumed in the wake of the World Trade Center and Pentagon attacks.
Friday, the University of Michigan's latest survey of consumer confidence showed the lowest level in eight years. Also Friday, the government said the gross domestic product grew slightly faster than previously reported for the summer quarter, but still at a slight 0.3 percent rate. It is expected to drop during this fall quarter.
To counteract this slowdown, the Federal Reserve Board could cut interest rates again at its meeting Tuesday in an attempt to further stimulate the economy by making borrowing cheaper. So far, the Fed has reduced its federal funds rate nine times from 6.5 percent last year to 2.5 percent. It is cutting rates faster than the central bank in Japan did in the early 1990s after its ``bubble economy'' of the 1980s collapsed. And it is faster than it did after the 1929 stock market crash, says InvestTech's Stack.
But the stimulus of lower interest rates is running into a larger problem: a global recession.
With Japan's economy now contracting and Germany close to a decline, it will mean that the world lacks a large economy to restart growth. Stephen Roach, chief economist at Morgan Stanley, has warned about this danger and has further cut his estimate for world growth next year from 3.4 percent to 2.1 percent.
If world growth were to decline more than expected, it could create the worst world economy since World War II, he warns.
It's hard to know when the United States might emerge from the current decline, partly because the signs of recovery aren't present yet.
A widely followed indicator of where the economy is headed over the next six to nine months showed a further weakening.
``The economy is going to get worse for the time being,'' said Anirvan Banerji, director of research for the Economic Cycle Research Institute, a consulting company.
Some adapting
Still, Silicon Valley has managed to adapt during recessions.
Doug Henton, president of Collaborative Economics, said the valley's recessions have not usually coincided with national recessions.
For instance, technology industries were hit hardest during the 1970 defense-spending cutbacks, not during the 1973-74 oil embargo. Technology also suffered in 1984-85 after a stock market bubble rather than during the 1981-82 recession.
Most interestingly, Henton has found that key innovations occur here during recessions. In 1970, valley semiconductor companies learned to sell their chips to the civilian market because their defense business declined.
In the 1984-85 recession, Intel shifted from its memory chip production to microprocessors, laying the groundwork for its boom in the 1990s. And during the 1990 recession, the valley witnessed the beginnings of the commercialization of the Internet, which fueled the dot-com boom.
His conclusion: ``Innovation occurs during the down cycle. In the up cycle, people are copying a basic idea over and over.''
That's why he's optimistic that Silicon Valley now may be laying the foundation for the next tech boom.
``We ride these waves of innovation,'' he says. ``It's the darnedest thing.'' |
