‘New Economy’ Hasn’t Put an End to Business Cycle
Just a year ago, many Americans were beginning to wonder whether the prosperity of the amazing ‘90s would last forever. The economic expansion that began in March 1991 became the longest in history in February and will span an entire decade if it can hold on through the first three months of the new year.
Had the technology-based “new economy” become so efficient that it turned the business cycle, with its periodic slowdowns, into nothing more than a memory?
Not a chance.
At the end of 2000, the unstoppable economy suddenly looks stoppable. Danger signs suddenly seem to be everywhere. Growth has slowed sharply. Business profits have turned lower. Stock prices have plunged. Layoffs are reappearing.
Other economic dominoes have begun to fall. Consumer spending--driven largely by stock-based wealth and confidence in the job market--slackened just in time for the holiday shopping season. And consumer spending had been a key engine driving the booming ‘90s.
After a long absence, the “r” word--recession--has found its way back into economists’ vocabularies. Edward E. Leamer, director of the UCLA Anderson Business Forecast, predicts one--brief and mild, but a recession all the same--to begin midyear and last about six months.
Leamer is particularly alarmed by the dollar’s recent battering on international currency markets. As recently as a month ago it took only 86 cents to buy one euro, the common currency of the European Union nations. At the end of last week the price had risen to 94 cents.
Leamer worries that a falling dollar might persuade foreigners to begin selling off their U.S. stocks, bonds and other financial assets. That would depress the stock and bond markets, and lower bond prices mean higher prevailing interest rates. Higher rates in turn would reinforce any weaknesses in interest-sensitive sectors such as housing.
“This expansion that we had in the last four or five years was largely financed by foreign sources,” he said. “If that dries up and it dries up rapidly, it would call for a serious and significant downturn” in the U.S. economy. When the books are added up, they are expected to show that more than $400 billion flowed into the United States this year, quadruple the level of just five years ago.
The dollar’s prospects are clouded not only by growing perceptions of U.S. economic weakness and unstable financial markets, but also by a trade deficit that seems to break records every month and has put a sea of dollars in foreign hands.
Government officials already are talking up two very different strategies to combat an actual or potential recession: an interest rate cut by the Federal Reserve and a tax cut along the lines of President-elect George W. Bush’s $1.3-trillion 10-year proposal.
But Leamer said the Fed could find itself trapped between pressure to stimulate the economy and a need to tighten credit to head off inflation and bolster the dollar’s value.
Making the Fed’s predicament all the nastier is the soaring price of energy, a phenomenon that is only too familiar to Californians.
“The whole country is paying more for natural gas and heating oil this winter,” said Ted Gibson, chief economist for the California Department of Finance. “That could affect consumers as well as factories.”
Leamer even sees signs of a downturn in the record auto and truck sales of the year just ending. The motor vehicle market was strong early in the year. In November, by contrast, new-car sales tumbled 2.2%, the steepest drop since a strike against General Motors Corp. in July 1998. Sales were down in October too, by 1%.
That trend, Leamer said, could be particularly damaging because auto makers have been expanding their production lines in anticipation of continuing strong sales of SUVs and other vehicles.
In fact, GM announced this month that it would scrap the Oldsmobile and eliminate 5,000 U.S. white-collar jobs on top of several thousand contract and temporary positions. All of the traditional Big Three auto makers plan to idle factories soon to clear out unsold inventory.
Workweek Hours an Early Indicator
In the high-tech sector, there recently was a stream of companies in the computer, software and semiconductor industries reporting disappointing sales. If that portends a sustained downturn in capital spending, it could have broad repercussions for the economy, particularly in Silicon Valley and other technology-dependent regions of the country.
The manufacturing workweek, often an early indicator of economic trends, also has declined. It slipped to 41.1 hours last month, down from a peak of 42.2 hours in April and the lowest since the January 1996 level of 40 hours.
A decline in the workweek tips off economic analysts because as business conditions begin to deteriorate, employers tend to quickly reduce workers’ hours. Layoffs, which would be reflected in the unemployment rate, typically come later.
No less a figure than the president-elect has been publicly ruminating about the possibility of a recession. But most analysts are less gloomy.
Gibson, for example, remains confident that foreign investors will keep their money in this country despite the declining dollar, because the United States still offers a unique combination of profit and safety. In fact, he regards the weaker dollar as a blessing that could boost U.S. exports by lowering their cost.
At the same time, Gibson sees trouble in the job market, citing a recent climb in the number of people filing initial claims for state jobless benefits. The four-week moving average of claims rose to 347,250 in mid-December, the highest since July 1998, although it declined in the week ended Dec. 23.
And when the economy is downshifting, as it is now, it is at its most vulnerable, he said. “We could be looking at a pretty weak first quarter,” he said, “but I’m not sure I’d call it recession.”
Computerization May Ease Cycles
Other analysts say it’s too soon to play down the beneficial effects of the new economy. The information revolution may not have abolished the business cycle, but it could work to reduce the economy’s peaks and valleys.
Recessions often start because businesses misread the marketplace and build up large inventories that they can’t sell. They respond by slashing factory orders, and factories then lay off workers.
Many analysts believe that corporate America should be able to navigate more efficiently through such waters because computerized records should allow it to identify inventory buildups sooner.
“Given the conditions as they are now, the gloom and doom is unwarranted,” said Ben Herzon, an economist with Macroeconomic Advisers in St. Louis. His firm predicts a relatively healthy 3% U.S. growth rate next year--compared with this year’s 3.6%--and a weak first half followed by more robust growth in the second.
“If we get a rate cut by the Fed, and if we get tax relief by the second half of next year, it certainly doesn’t look like it’s going to be a recession,” Herzon said. “Our modeling of the economy suggests it would take much bigger shocks to get a recession.”
