Many Factors Are in Place to Cushion the Recession
If the questions I’ve been getting lately are any guide, the issue no longer is are we in a recession, but rather, how bad will it be and when will it end? In this regard, most statistics seem to point to a serious decline.
Retail sales during the key holiday shopping season were the worst in recent memory. Industrial production in November fell by the most for any month in eight years, while new orders for durable goods dropped by 10.5%--tying the all-time record for a single month’s decline.
Business has also been slashing payrolls. There were 1.3 million fewer people working at the start of this month than there were in June, pushing the jobless rate up to its highest point in four years.
And then there is that elusive, hard-to-quantify element called psychology. Already battered by events in the Mideast and by turmoil surrounding Washington’s deficit reduction agreement, confidence levels have plunged in response to the widespread declines in employment.
Indeed, to many businessmen and consumers who are experiencing a downturn for the first time in their adult memory, it looks like the end of Western Civilization as we know it.
Having warned readers more than three years ago that a recession was looming, recent events should come as no surprise. Indeed, as I have pointed out in the past, today’s recession--the ninth of the postwar era--had its origins in the stock market crash of October, 1987, and its impact on attitudes, wealth and real estate.
Those who heeded these warnings might have missed making the last few dollars in profits but are undoubtedly better prepared to weather today’s economic storm because they didn’t overexpand, overhire, overbuy or overborrow. Of course, this is small consolation for those who, for one reason or another, got caught up in the current maelstrom and are wondering what comes next.
Even though this downturn has only recently been recognized--and follows in the wake of such developments as a record peacetime expansion, soaring public and private debt, two oil shocks in five years and an increasingly fragile banking system--it appears that this recession will be about average in severity.
Here are my reasons:
* Better inventory management will minimize down time as producers adjust to slumping sales. Business has been expecting this recession for several years, and use of computers to track goods is widespread.
* Home building has been sliding for five years and must be near rock bottom. The drop in home prices should soon attract buyers.
* The lower-valued dollar should help cushion this decline by spurring exports; they shot up 8.5% in October alone.
* We entered this recession with much less inflation than we had going into the last two major slumps, so the Federal Reserve should be able to ease more forcefully to help end it.
* At any rate, monetary policy has already eased well before this recession has begun. Witness how low our inflation-adjusted interest rates are compared to other industrialized countries. The Fed has also cut its key discount rate and eliminated certain reserve rules.
* Small businesses, responsible for all the jobs created in the 1980s and then some, are less likely to be affected by the recession than larger companies.
* There’s plenty of stimulus left in Washington’s budget--the deficit agreement notwithstanding. First of all, the deficit is rising, not falling. Second, the announced “cut” of $40 billion for the current fiscal year is less than 1% of gross national product--nowhere near the dose of restraint enacted under the Herbert Hoover Administration, for example.
* There will be less of a drop in defense spending than was scheduled earlier because of the crisis in the Middle East. And there’s plenty of public works expenditures still in the pipeline, such as for repairing and rebuilding the nation’s infrastructure.
* Most households have more than one person working--and there are many instances where one or more of these family members hold at least two jobs, so the impact of any foreseeable rise in unemployment is likely to be less severe than in past recessions. In addition, most people now work in the service sector, which is less likely to be affected by a downturn.
For the moment, based on a careful perusal of the statistics and on the assumption that the economy peaked in August, a recession of roughly average dimensions appears to be shaping up. Since the average recession has lasted about a year, it could mean that bottom will be plumbed by next summer, and that growth will resume well before year-end. As this becomes recognized by the public at large, confidence will return and spending will increase.
To ensure this outcome, the monetary authorities should continue to ease. Interest rates should be slashed by another point, bank reserves should be pumped up and the regulators should back away and encourage the banks to lend money again.
For his part, President Bush needs to resolve the Mideast crisis, then convince the American people that he is in control of our domestic economy. He must also show that he and the Congress can work together to fashion a budget that addresses the nation’s domestic needs, while at the same time reducing Washington’s deficit over a reasonable period of time.
