Worries Are Increasing About Speed and Vigor of a Recovery
May 4, 2002
ECONOMIC ANALYSIS
By FLOYD NORRIS
he early days of the current economic recovery are beginning to resemble the early days of the last one. That may mean that economic growth will be slower than many people have expected and that unemployment will keep rising for some time even while the economy is growing.
"We are in the midst of a recovery, but uncertainty about its strength has increased," Nanette Abuhoff, a bond market strategist at J. P. Morgan Chase, said yesterday after the government reported that the April unemployment rate had climbed to 6 percent.
Worries about the strength of the recovery could yet provide the stimulus to help the economy grow faster, as the government reacts to fears that this will be a "jobless recovery," as Ari Fleischer, the White House press secretary, described it yesterday.
The similarities between the recent recession and the last one are certainly substantial. Both were relatively mild in job losses and both featured an international shock that ended with a United States military success: the Persian Gulf war in 1991 and the action in Afghanistan this year.
The two recessions were also unlike previous ones in that they were less likely to claim the blue-collar jobs of auto and construction workers, who were traditionally among the hardest hit in downturns. In 1990-91, the brunt seemed to fall on middle managers as companies tried to slim down. This time the hardest-hit industries were the stars of the previous boom, technology and telecommunications.
Audio: The Times's David Leonhardt
U.S. Jobless Rate Increases to 6%; Highest in 8 Years (May 4, 2002)
Mixed Signals on the Economy (May 3, 2002)
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In normal recoveries, the industries that suffered the most are the ones that come back the strongest. But after 1991, many companies were determined to avoid returning to what they saw as bloated cost structures. And this time there is limited evidence of a resurgence of technology and almost none of an end to reductions in telecommunications spending. But demand will eventually come back for those businesses, so there is reason to hope that the period of slow growth will not be as long as it was after 1991.
Many people would welcome a repeat of the recovery from the 1990-91 recession. That recovery more than made up in duration what it lacked in initial vigor, going on to become the longest recovery in United States history. But it also cost the first President Bush his job, a loss that is no doubt remembered by the current President Bush.
Some think that that memory will make the government more likely to do what is necessary to get the economy moving. "We have a ton of stimulus now," said James Glassman, a senior economist at J. P. Morgan Chase, who noted that the first President Bush had been reluctant to push for stimulus measures like the extended unemployment benefits now in place. Mr. Glassman said he thought Congress and the current president would provide more stimulus, if needed. And Wall Street, Mr. Glassman notes, now thinks the Federal Reserve is less likely to raise interest rates soon.
If this recovery followed the normal path, set by the first eight recoveries after World War II, then the rise in unemployment would be about over. On average, the unemployment rate peaked within two months after the recession ended in those eight periods. The rate never rose more than four-tenths of a percentage point after the recession ended, and it never took more than four months to top out.
Then came the 1990-91 recession. According to the National Bureau of Economic Research, the official arbiter of such things, that downturn ended in March 1991 with the unemployment rate at 6.8 percent. But the rate took 15 more months to hit its eventual high of 7.8 percent.
The mildness of the last recession is one reason that the recovery this time may be slow.
"Housing did not go down very much this time, so there is not much scope for it to go up," said Robert J. Barbera, the chief economist of Hoenig & Company. In the past, construction employment often helped to lead the economy out of recession.
Although the date has not been officially set, many economists say this recession ended last December. If so, the unemployment rate is up two-tenths of a percentage point four months after the end of the economic downturn. That is in line with the pre-1991 averages.
The stock market has found it difficult to deal with the competing economic currents. It rallied sharply in the fourth quarter of last year, as confidence grew that the recession was ending, but it has stumbled this year amid concern that the recovery might not be vigorous.
Stock prices declined after the unemployment report yesterday, with the Dow Jones industrial average off 85.24 points, to 10,006.63. But the Dow was still up a bit for the week as investors migrated toward solid companies outside the weaker industries. The technology-heavy Nasdaq composite was down 3.1 percent for the week and is now at its lowest level since October.
Over all, first-quarter corporate earnings reports were generally weak but not worse than expectations. But Wall Street seems to have been surprised and disappointed that corporate executives were unwilling to forecast quick gains in profits later in the year.
"The market looks out six months or so," said Chuck Hill, director of research at Thomson Financial/First Call, which tallies analysts' estimates, "and what the market is seeing is a lot of uncertainty."
Mr. Hill said that for companies in the Standard & Poor's 500-stock index, the first quarter was the fifth in a row in which profits came in lower than corresponding quarters the year before. Analysts say they think there will be a 1 percent gain in the second quarter, but that is a smaller gain than they had been forecasting. And they still think there will be large gains, of 21 percent and 32 percent, in the final two quarters of the year.
If corporate America comes to share those forecasts, then hiring could pick up, as could capital spending that would further spur growth. But for now, most companies appear to be hesitant to commit themselves to increased spending, whether for machines or workers. |
