A Belated but Accurate Call on the Status of the American Economy

You may find it hard to believe, but the recession is now officially over. Actually, it ended almost two years ago, according to an announcement last week by the umpire of the business cycle, the National Bureau of Economic Research.

A private research organization whose founder, Wesley Clair Mitchell, was one of the first to study the ups and downs in the U.S. economy, NBER has become the official arbiter of the business cycle, much the same way sporting events have umpires or referees. However, unlike a baseball game, for example, where the umpire will tell you immediately whether the ball is fair or foul, in business cycle analysis the decision doesn’t come down for quite a few months.

For one thing, the economic statistics don’t become available until weeks or even months have passed. For another, they tend to be revised more often than not. Consequently, NBER waits until all the numbers are in before rendering its judgment regarding whether a recession has begun or ended.

The bureau usually needs six to nine months to be sure that economic activity has changed course. For example, it took until April, 1991, before NBER declared that the economy reached a peak in July, 1990.

But the bureau waited much longer than usual to announce that this recession was “officially” over. If its past timing was any guide, NBER would have rendered its decision nearly a year ago.

Think, for a minute, what an earlier decision might have meant to George Bush’s reelection prospects. He would not have had to try to persuade the American people that the recession was finished. Of course, NBER is nonpartisan, so this declaration was made only after the seven-member committee that rules on recession dates was sure that the economy had stopped contracting and was once again growing.

Why did the bureau wait so long this time around? No big mystery here; the recovery has been unusually weak--some say, the weakest in more than half a century. That being the case, the members of the business cycle dating committee simply weren’t sure that the recession was indeed over.

Normally, the economy jumps out of a recession like a yearling from the starting gate. Growth in the first year of recovery has tended to average close to 7%. When the economy grows this fast, it’s pretty obvious to just about everyone that a recession has ended, so the bureau has no trouble making up its mind, waiting only long enough to pinpoint the exact month the recovery began.

This time, growth was so weak that it has been nonexistent in many parts of the country--as Southern Californians can attest. So you can’t blame NBER for wanting to be certain that--on the national level, at least--the recession has departed.

To give you an idea how weak the national recovery has been, the gross domestic product has expanded by less than 3% in the six quarters since the recession officially ended. This compares to an average rise of 10% during the same period following seven previous recessions.

You can see it in job creation. Employment levels were literally unchanged a year and a half after the end of this last recession; in the past they’d be up by about 5.5%. Indeed, the number of people out of work and looking for a job has actually risen nearly 11% since the end of the recession; unemployment usually falls about 23% over this same period.

Not surprisingly, buying power has increased only 2.5% compared to an average rise of 11.3%. Thus, retail sales, adjusted for inflation, have expanded less than half as much as they usually do during the first 19 months of an economic recovery.

Business has responded by slowing assembly lines. Industrial production has grown only 4.1%, versus an average of 18%. As a result, corporate profits have gone up much less than usual, rising 4.9%, compared to an average of almost 40%.

This has not been lost on investors, who have bid share prices up only a third as fast as they usually do in the 19 months after the end of a recession.

Well, what kind of recession did we experience that has kept its shadow on parts of the economy nearly two years after its end? Ironically, it was very mild--indeed, in just about all respects, the most benign in recent memory.

For one thing, it was only eight months long, compared to the postwar average of 11 months. Looking at its depth, the real GDP fell 1.8% during this recession, compared to the postwar average of 2.2%, 3.2% during the 1981-82 downturn--and 4.3% during the 1973-75 slump. Industrial production fell only half as much as it usually does.

Interestingly, employment fell much less than it usually does during the typical recession, while the jobless rate didn’t rise as much as it did in the past. However, as observed above, employers continued to pare payrolls well after the recession ended--which is the reason why the recovery has been so anemic.

Buying power did take it on the chin, falling five times as much as it usually does, but some of this might have been because of the fact that short-term interest rates fell to 30-year lows, and the average family is much more reliant on interest income than in the past.

Considering that corporate profits fell less than half as much as they usually do in recessions, you might wonder why the urge to keep slashing payrolls--even after the recession ended.

The answer lies in the debt that many firms took on in the 1980s. Interest expense as a percent of pretax profit hit 44% during the last recession--more than twice as high as average, and the highest of any of the eight previous downturns.

With post-recession sales rising at only one-half the average pace, and a marked difficulty in raising selling prices, the only way most companies could generate the cash flow to service their debts was to cut costs. Unfortunately for the typical worker, labor is the average firm’s biggest cost item and the one that is most easily reduced.

The sluggish pace of the recovery is the main reason why it’s been so hard for business to increase prices. Nineteen months after the end of the last recession, the rate of inflation is only 3.2%--the lowest for any such period in at least 20 years.

If this keeps up, the members of the bureau’s business cycle dating committee may not find a need to get together for quite a while--maybe not until the next century--to decide the starting date of the next recession.