Reports Suggest Economic Recovery
Experts See Clear Signs Recession Is Fading
By John M. Berry
Washington Post Staff Writer
Saturday, December 29, 2001; Page A01
For the first time in many months, a series of economic indicators, released yesterday, all contained solidly positive news, suggesting to many analysts that the recession that hit the U.S. economy last spring may end soon.
The Labor Department reported that initial claims for unemployment benefits last week remained below the 400,000 level for the third week in a row. That level of claims indicates that job losses have slowed and the number of payroll jobs has stabilized, analysts said.
Meanwhile, the Conference Board, a New York-based business research group, said its consumer confidence index jumped nearly nine points, to 93.7 this month, after being depressed in October and November following the Sept. 11 terrorist attacks. The increase brought the confidence index back in line with the University of Michigan's consumer sentiment index, which began to recover last month.
"The deterioration in current economic conditions appears to be reaching a plateau, led by a stabilizing employment scenario," said Lynn Franco, director of the Conference Board's Consumer Research Center. "Consumers' short-term optimism is no longer at recession levels, and the upward trend signals that the economy may be close to bottoming out and that a rebound by mid-2002 is likely."
Analysts drew similar conclusions from two Commerce Department reports. One showed that new orders for durable goods, excluding aircraft and defense items, rose 2.4 percent in November on the heels of a 4.1 percent gain in October. Orders for new motor vehicles rose substantially, to a level not seen since last spring, and high-tech orders, which had been falling since the middle of last year, were also up for the second month in a row.
The other Commerce report showed sales of both new and existing homes rose in November, with the former reaching a level not seen since January.
These positive signs are coming at the end of a year in which the U.S. economy has been struggling to rid itself of the nasty aftermath of the 1990s boom. As with a partygoer with a hangover, the passage of time is having considerable healing effects.
Repeated interest rate reductions by the Federal Reserve -- 11 of them -- have helped lower borrowing costs for many households and businesses. Low mortgage rates have kept the housing sector almost impervious to the recession. Some analysts say only the very low cost of borrowing money allowed automakers to offer the no-interest financing that spurred record vehicle sales in October.
Moreover, even though some key short-term rates are at their lowest level in nearly half a century, Fed officials may continue cutting rates until there is unambiguous evidence the slump has ended.
But while they stress the continuing uncertainties and risks facing the economy, a number of Fed officials have no real quarrel with the government policymakers and private economists who expect the economy to begin growing again shortly. A few analysts say the turnaround is already happening.
"The U.S. economy is often a thing of beauty as it comes out of recession and renews expansion," said economist Joe Liro of Stone & McCarthy Research Associates, a financial-markets research firm. "We expect to see such a transition during 2002's first half, leading to very strong growth by year's end."
While individual economists differ on how soon the economy will turn up and how vigorously it may grow in the second half of the year, Liro's predictions are close to many others'. For instance, the composite forecast from the 24 economists on the Bond Market Association's economic advisory committee is very similar to Liro's forecast.
Nevertheless, the economy still faces significant risks. High on the list is the possibility of another terrorist attack, even on a much smaller scale than those of Sept. 11, that could do renewed damage to fragile consumer and business confidence. If that happened, consumer spending and business investment could turn down, extending and deepening the recession. A serious new crisis in the Middle East or elsewhere might have the same effect.
Some analysts, such as those at Goldman Sachs & Co., also are concerned that even if unemployment stabilizes, it still will remain high enough to limit increases in household income in the coming months and restrain gains in consumer spending. The jobless rate last month was 5.4 percent, up from 3.9 percent in the fall of 2000, and even if the recession ends immediately, the rate is likely to go higher. Even optimistic forecasters say it could hit 6 percent, or perhaps 6.5 percent.
The failure of Republicans and Democrats to agree on provisions of an economic stimulus bill this month may keep growth a bit lower than if the bill had passed, a number of analysts said. Others worry that business investment in new equipment, particularly in the high-tech sector, which has been falling for more than a year, could remain weak through much of 2002. And slow growth or outright recessions for many nations that are U.S. trading partners may limit markets for American-made goods and services.
Nevertheless, in addition to the figures out yesterday, there have been numerous other signs recently that the economy's decline has begun to flatten out as the shock of the terrorist attacks has receded. For example, factory production is down 7.6 percent from its peak in June 2000, but last month it declined just 0.2 percent, following 0.9 percent drops in both September and October.
Despite Goldman Sachs's concerns about the consumer, it revised its forecast for growth in the April-June period to an annual rate of 3 percent, from 0.5 percent, saying, "Most of the economic news point to an earlier economic recovery."
Thomas M. Hoenig, president of the Kansas City Federal Reserve Bank, has seen a shift in the tone of the information he is getting as he talks with business executives in his sprawling district. Not long ago, he was hearing little but strongly negative comments.
According to manufacturers in the district, "things continue to be generally weak but less weak" than they were right after the terrorist attacks, Hoenig said in an interview. "Inventories strike me as coming down to the point that they may not fall much more. Some retailers were very careful in ordering and ran out of goods this month. I talked to others about how things are going and got very positive responses."
Hoenig said the signals still are mixed, but they are "more positive than I expected," adding that one executive told him, "I am beginning to think we are at the bottom."
What everyone expects to lift the economy off that bottom is the same thing that always happens when manufacturers, wholesalers and retailers decide they have reduced their stocks of unsold goods to an acceptable level, given the amount of sales they expect to make.
In the boom of 1998 and 1999, many firms geared production to meet rapidly rising demand for goods and services. But demand began to falter, particularly for high-tech equipment in the spring of 2000, and the stock market bubble that had been inflated in part by those spending expectations burst. Households began to trim spending plans, too. Suddenly, companies found themselves with swelling stocks of unsold goods and weaker sales prospects.
In response, orders for new goods were cut. The resulting drop in production hammered manufacturing firms, which have shed 1.22 million jobs since mid-2000. Over that period, the slashing of inventories has reduced the U.S. economic growth rate by a full percentage point.
With sales firming since September, particularly for new cars and light trucks, stocks of unsold goods are being reduced in the last three months of this year at an annual rate of about $100 billion, the sharpest reduction in history, according to several analysts. If firms just stopped cutting inventories -- without rebuilding them -- it would add 4 percentage points to the growth rate, if that happened in a single quarter.
Economists at Macroeconomic Advisers, a St. Louis forecasting firm, expect that to happen in the first three months of the new year. That's why their optimistic forecast calls for the economy to grow at a 1.7 percent annual rate in the first quarter.
Few forecasters expect the inventory swing to occur that quickly, but it is the powerful force that most are counting on to get the economy moving upward once more. |
