Recession official, but it may have peaked
By George Hager
USA Today
Bad news: Economists made it official yesterday, declaring that the U.S. economy has been in recession since March, when employment peaked and began to head downhill.
Good news: It's another hint that the slump might be over or nearing an end. History suggests that by the time economists have enough evidence to conclude a slowdown is more than just a pause that might correct itself, chances are it's over or close to being over.
Many economists say other signs also point to an early end to the slump: Unemployment claims have fallen four weeks in a row. Retail sales boomed in October. Consumer moods have brightened marginally, instead of getting bleaker.
"Odds are approaching 50 percent that the recession has ended," reports International Strategy & Investment, which points to the confidence-boosting success of the war effort in Afghanistan, a huge surge in the money supply and a major rally in the stock markets, which typically recover three to six months ahead of a rebound in the broad economy.
"It's not entirely crazy" to suggest the recession is over, says Mark Zandi, chief economist for Economy.com. He adds that it's possible, though unlikely, the economy bottomed out this month and will head back up from here.
One tantalizing sign is the big spike in unemployment claims that followed the Sept. 11 terrorist attacks and has since dramatically improved. That typically happens at the end of a recession, Zandi says, as businesses make one final push to cut their costs and clear the decks for a recovery.
Unemployment dips
After bouncing between 350,000 and 450,000 a week for most of this year, jobless claims suddenly shot up to an ominous 535,000 in the last week of September. But beginning in late October, initial claims for unemployment benefits began a four-week fall and hit 427,000 by the middle of this month.
But is that a real turning point, or just another fake the economy has thrown at economists since the slowdown gathered force late last year? Most forecasters have consistently underestimated the severity of the slump, repeatedly predicting turnarounds that failed to materialize as conditions got worse instead of better.
Even the Federal Reserve was caught off guard, leaving interest rates alone at its regular meeting on Dec. 19, 2000, and making an emergency rate cut just 15 days later when policy-makers realized the economy had hit a wall at year's end.
Not at bottom yet
Now, as then, forecasters think they know where the economy is going. Despite the growing sentiment for a quick rebound, most economists are a little more cautious. Though the National Bureau of Economic Research's business cycle dating committee — the six-member group that sets dates for recessions — said nothing about when the slump might end, Jeffrey Frankel, panel member and Harvard economics professor, said his view is that it has a ways to go.
"As an individual, I don't really see any evidence that we've hit the bottom yet," Frankel says. "The standard forecasts out there are for a recovery in 2002, and that sounds about right to me."
Average post-World War II recessions have lasted about 11 months. If this one's average, it would end in February. The survey consensus is for a rebound sometime in the first half of the year, generally by spring.
But forecasts vary widely and are subject to unpredictable variables. Another major terrorist strike could rock consumer confidence and turn any prediction into hash.
In making its call yesterday, the National Bureau of Economic Research said that without the Sept. 11 attacks, it was "possible that the decline in the economy would have been too mild to qualify as a recession."
But even assuming no more major attacks, economists aren't sure how quickly the economy will regain its footing, chiefly because they don't know how bad the job situation will get or how consumers will react.
Confusing signs
Zandi says his best guess is that the slump will run another three to six months. "We are in store for more job losses, unemployment is going to continue to rise, and it is going to weigh heavily on (consumers)," he said.
Tucker Hart Adams, chief economist for U.S. Bank, says conversations with bank clients suggest companies will continue to cut jobs. Obviously, people without work sharply cut their spending, but what's not known is how much the fear of losing work will hurt those who still have jobs. "For every person who gets laid off, there are a dozen others who say, 'Good grief, will I be the next one?' " Adams says.
Other signs also remain confusing.
"Industrial numbers are behaving as if we're in the deepest (slump) since the Great Depression, but the consumer side is behaving as if it is in a slowdown," says economist Joel Naroff.
Experts say that the business community is generally the last to know a rebound is coming.
"Consumers and households are usually the first to know," he says, and given the continued strength in consumer spending, "the answer (to whether a rebound is coming soon) is yes."
