Despite Appearances, Economy Is Still Shaky
By LOUIS UCHITELLE
May 5, 2002 [New York Times]
NOW comes the hard part.
Put aside the recession, and the marvelous surge in the first quarter. That certainly did wonders for appearances. But in fact the American economy is like a brightly painted pier without enough piles to support it. Step too hard in the wrong place and the pier sags into the water. The hard part is putting enough piles in place before reality overwhelms appearance.
Just two piles sustained appearances in the first quarter, making the economy seem sturdy. They were stepped-up government spending, for defense at the federal level and public works at the state and local levels, and stepped-up business spending to maintain stockpiles of merchandise after they were depleted during the recession. Take away these supports and the economic growth rate, instead of being a robust 5.8 percent at an annual rate, as announced, would have been a meager 1.3 percent.
"When you see a number like 5.8 percent, `Well,' you say, `the recession is over,' but that is not what the Commerce Department told us in the latest G.D.P. report," said Robert Pollin, an economist at the University of Massachusetts at Amherst.
The G.D.P., or gross domestic product, is the total value of all the goods and services produced each year in the United States. The Commerce Department calculates the G.D.P. quarterly and these calculations have become the most popular measure of the economy's ups and downs. A 3 percent annual growth rate is generally considered the minimum necessary to give people the feel of prosperity. Less than 3 percent is insufficient to generate enough jobs to keep down the unemployment rate or enough tax revenue to maintain public spending at the state and local levels — among other ills.
Less than 3 percent appears to lie ahead for most, if not all, of this year. Government spending and inventory maintenance, for example, are unlikely to be as supportive as they were in the recent past.
The G.D.P. report for the first quarter — once the piles were counted — was the first clear signal that the quick recovery that everyone yearns for, and that many forecasters still promise, is unlikely. In case anyone missed the signal, the employment report on Friday amplified it. With job creation almost nonexistent, the unemployment rate jumped to 6 percent in April from 5.7 percent in March. It goes almost without saying that the Federal Reserve's policy makers, when they meet on Tuesday to discuss interest rates, will not raise them. Just a couple of months ago, many forecasters had expected rates to be rising by now, in anticipation of a potentially inflationary growth rate.
"We are compiling a picture of an economy that is going to struggle," said Mark Zandi, chief economist at Economy.com.
Economic growth is a tricky concept. Even without growth, the dynamic American economy churns out more than $10 trillion a year in goods and services. That number has to rise continuously, however, by at least $300 billion a year to generate enough incomes and jobs. Each additional $100 billion increase adds a percentage point to the G.D.P.'s growth rate.
In these metrics, inventory replenishment contributed a very hefty 3.1 percentage points to the first quarter's 5.8 percent growth rate. That sort of replenishment is not likely to be topped this quarter, with its sudden signals of weak growth. Why replenish only to be stuck with unsold goods?
Government spending shows similar stress, after contributing 1.4 percentage points to first-quarter growth, half of it at the federal level and half at the state and local levels. Federal spending went up because of rising outlays for defense. That could happen again. But many states and cities have begun to slash spending in response to less-than-expected tax revenue.
THERE are the usual standbys, of course. Residential construction added 0.7 percentage point. House building, already at a record level, rose more. Can it go even higher in the second quarter, making another contribution to growth? Most experts are doubtful. Consumer spending is the other heavy hitter. But consumer spending at home cannot be separated in the G.D.P. from net exports, which are what we sell to foreign consumers minus the greater amount we import. Together, consumer spending, globally defined, contributed only 1.3 percentage points in the first quarter, and is in danger of falling in the second.
That leaves hope. The expectation of Kathleen Cooper, the Commerce Department's undersecretary for economic affairs, is that profits will revive, encouraging business to step up investment in machinery and software, lifting growth. Maybe. There is already stirring in this quarter. But not enough to qualify as piles supporting the glossily painted, but shaky pier.
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