Economy Shows Added Strength
Recession Could Be The Mildest Ever
By John M. Berry
Washington Post Staff Writer
Friday, March 1, 2002; Page A01
The U.S. economy bounced back from the shock of the Sept. 11 terrorist attacks to grow at a much faster rate in the final three months of last year than initially estimated, the Commerce Department reported yesterday.
Fueled in large part by strong consumer spending, the nation's economic output rose at a 1.4 percent annual rate in the fourth quarter, the department said, sharply revising its earlier estimate of a meager 0.2 percent annual growth rate.
Even though economists at the National Bureau of Economic Research (NBER) said a recession officially began last spring, the new figures indicate that overall economic activity declined only in the third quarter of last year.
If the current growth estimates hold up through future revisions, last year's slump would be the mildest U.S. recession ever, and the only one with just one quarter of economic contraction, measured as a decline in the nation's inflation-adjusted gross domestic product. Real GDP fell at a 1.3 percent annual rate in the third quarter largely because of the terrorist attacks, which depressed consumer spending, disrupted travel and triggered hundreds of thousands of layoffs.
In congressional testimony Wednesday, Federal Reserve Chairman Alan Greenspan said he and other Fed officials believe that the recession has ended and a recovery has begun.
One sign of economic improvement could be found in the Labor Department's report yesterday that while initial claims for unemployment benefits rose slightly last week, the average level of new claims filed in each of the past four weeks fell to only 373,250. Except for one four-week period this past August, that was the lowest level since March, the month the NBER said the recession began.
In calculating the fourth-quarter growth rate, the Commerce Department raised its estimates of consumer and government spending in those three months, while lowering its estimates of imports -- which count as a negative in GDP accounting. According to the new numbers, consumer spending shot up at a 6 percent annual rate, largely because of a huge increase in sales of new cars and light trucks, spurred by no-interest financing. In contrast, business spending for new plants and equipment declined at a 13.1 percent annual rate, slightly more than estimated previously.
Overall sales were strong enough to more than offset the drag from a record decline in business inventories. Production of goods continued to fall during the quarter as manufacturers, wholesalers and retailers all sought to reduce their stocks of unsold goods. Their efforts trimmed 2.2 percentage points off the quarter's growth rate; that is, if inventories had declined at the same pace as in the third quarter, the fourth-quarter growth rate would have been 3.6 percent rather than 1.4 percent.
But analysts and government policymakers now expect inventories to decline at a much slower rate in the first three months of this year, likely boosting growth by at least as much as it reduced it in the fourth quarter.
"We now expect the first quarter to register a rather impressive 3 percent annual growth rate, which should be enough to convince the NBER to declare an official end to the very brief and mild slump of 2001," said economist Joe Liro of Stone & McCarthy, a financial markets research firm.
NBER economists said in November that the previous economic expansion ended last March after lasting exactly 10 years, the longest uninterrupted expansion in U.S. history. The committee bases such decisions on a set of monthly indicators, not changes in the GDP. The indicators include payroll employment, industrial production, inflation-adjusted manufacturing, wholesale and retail-trade sales and a measure of inflation-adjusted personal income.
"The committee gives relatively little weight to real GDP because it is only measured quarterly and it is subject to continuing, large revisions," said a recent statement by the NBER Business Cycle Dating Committee, the group that officially determines when recessions start and end.
Asked after a congressional hearing yesterday whether the NBER had been wrong to say a recession had started last spring, Treasury Secretary Paul H. O'Neill suggested that reporters "call Dr. Feldstein and ask if they have a recession-reversal key on their computers." He was referring to NBER President Martin Feldstein of Harvard University. However, O'Neill declined to say the nation has not been in a recession, instead saying only, "We're working our way out of a slow economic period."
In his testimony Wednesday, Greenspan said that until the terrorist attacks, the economy appeared to be "flat" in the third quarter, with inflation-adjusted GDP perhaps up slightly or down slightly. At that point, he expected growth to pick up in the following quarter.
In other words, in his opinion, without the attacks there would have been no noticeable decline in economic activity in any part of last year. Before the attacks, however, there had been a substantial contraction in manufacturing activity as firms throughout the economy slashed their inventories. Until the attacks, that weakness was being offset by gains elsewhere, such as purchases of various types of services.
The new GDP estimates were based on more complete and revised data than were available to the Commerce Department when it issued its advance report for the fourth quarter last month. Yesterday's figures are still regarded as preliminary, and a final revision will be released late next month. In addition, as it normally does, the department will release revisions in July for the three prior years -- in this case, 1999, 2000 and 2001.
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