Old Economy Bedrock for New Recovery
The nation seems to be emerging from a new breed of high-speed recession, one that’s over almost before it’s begun. Most of the credit is going to the very same trends that helped fuel the 1990s boom--the high-tech investments intended to reshape the country into a lean, mean New Economy.
But don’t tell that to Tony Raimondo, whose Columbus, Neb., metal fabrication business “fell off the shelf” 18 months ago and shows no sign of recovering despite substantial investments. Or to Peter Dalinis, a 27-year-old Seattle Web developer who may have to move in with his parents for lack of work. “It’s embarrassing, but I can’t find anything,” he said.
The nation is patching itself up from the triple whammy of a technology stock bust, corporate investment contraction and the Sept. 11 terrorist attacks. And it’s doing so more rapidly than most expected.
But the improvements are not coming at the headlong pace some economists claimed last week. And, according to a variety of analysts, the chief cause is not New Economy advances but a distinctly Old Economy trend: ordinary Americans, buoyed in large part by rising home prices and strong employment, continuing to buy.
“The two most striking qualities of this recession are its mildness and the fact that consumers have held up so well,” said Harvard economist Jeffrey Frankel, a member of the six-person panel that declares when recessions begin and end. Frankel cautioned that he was speaking only for himself.
“The fact that housing wealth kept rising through the recession and that people could take advantage of it through mortgage refinancing and home equity loans kept them buying,” said Karl E. Case, a Wellesley College economist and an expert on real estate markets.
What’s behind the nascent--and unexpectedly quick--recovery could help determine whether the country can resume the sharply upward arc of the late 1990s and quickly help people like Raimondo and Dalinis.
It also is of substantial political importance. Treasury Secretary Paul H. O’Neill already has claimed that credit is due President Bush’s 10-year, $1.3-trillion tax cut.
Federal Reserve Chairman Alan Greenspan has argued that recent improvements are a triumph of the central bank’s aggressive interest rate cuts and the kind of deregulated, technology-driven market economy he endorses.
New Economy advocates have gone still further and asserted that the improvements vindicate the notion that the country is undergoing a fundamental change to a wired, agile, entrepreneurial state.
“This proves there is a New Economy. It proves we’re able to react more rapidly and effectively to change,” declared Joel L. Naroff, a Holland, Pa., economic consultant. “We do everything more quickly--even recessions.”
One problem with New Economy claims, according to analysts, is that, if true, they could paradoxically make it harder for the country to snap back from recession.
For example, statistics released last week showed continued surprising improvement in productivity, the economy’s ability to make more goods and services for every hour of work. While the trend means business is more efficient--a key aim of New Economy theorists and companies’ high-tech investments--it also means firms can boost production without adding workers.
The result: The economy may grow even faster than it has been without reducing unemployment.
A second problem is that the grandest of the New Economy claims simply don’t square with recent developments. That seems especially true in the nation’s manufacturing sector, where high-tech inventory systems and global competition have worked immense changes, yet goods-makers have suffered more than almost anyone else in the current downturn.
Plagued by a strong dollar and overcapacity, the sector has been in depression for more than a year, with output falling and layoffs of more than 1.6 million workers. Statistics last week suggesting the worst may be over haven’t translated into new business for Raimondo and many of his colleagues.
“We don’t see a recovery,” said the chairman and chief executive of Behlen Manufacturing Co., which makes everything from metal buildings and grain silos to dog kennels. The firm has lost more than one-fourth of its business and has laid off 400 of its 1,600 employees.
“We’re struggling month to month,” said Don Wainwright, chairman and chief executive of St. Louis-based metal fabricator Wainwright Industries Inc. and chairman of the National Assn. of Manufacturers.
“There’s just a paralysis out there. Nobody wants to take a chance.”
That paralysis has carried over to corporate America generally, where tumbling profits and stumbling stock prices have produced a sharp contraction in business investment and a string of spectacular bankruptcies that includes Enron, retail giant Kmart and telecommunications operator Global Crossing.
But there--to almost everyone’s surprise--the trouble has stopped, and a firewall seems to have arisen between the economy’s corporate and consumer sectors.
“The economy is pretty weak, but consumers have stayed strong,” said Massachusetts Institute of Technology economist Robert M. Solow, a Nobel Prize winner. “They’re not worried about debt. They’re not scared of unemployment. There’s not any panic. It’s a puzzlement.”
Some analysts have come up with an answer to the puzzle: that the layoffs and stock market losses that analysts feared would wreak havoc on the economy have taken their tolls on unexpectedly narrow groups or regions, leaving the rest of the country to go about its business.
Although the recession was widely reported to have touched virtually all industries and parts of the country, government statistics show that layoffs fell predominantly on young workers, temporary employees and certain regions.
More than half of the employment shrinkage over the last year was among 16- to 24-year-olds, who either were laid off or did not enter the labor force in the numbers they had during the boom years, according to U.S. Census Bureau figures.
Although temporary workers make up only 2% of the work force, they accounted for more than one-third of the job losses between February 2001 and last month, Labor Department figures show.
As for regional concentration, the West Coast--hit hard by the technology and telecommunications collapses and setbacks in commercial aerospace--has been the big loser. Washington reported the highest unemployment rate in the nation, at 8% in January, the latest month for which figures are available. Oregon and California were close behind at 7.5% and 6.2%, respectively, both well above the national average of 5.6%. In February, the nation’s unemployment rate stood at 5.5%.
Dalinis, the Seattle computer programmer, knows about the concentration of layoffs, having been a temporary worker and from a state with high unemployment. He says that when he arrived from Chicago four years ago, he would get 30 calls a day from potential employers. Now, he gets none.
“I wanted to be one of those millionaires by the time I was 25,” he said ruefully of his move West. As he collects the last of his unemployment checks, he said he is considering a career change--to cooking. That, or sell his car and move back to Chicago and in with his parents.
“We’ve really concentrated the job losses and let the rest of the nation kick back,” said Paul E. Harrington, associate director of the Center for Labor Market Studies at Boston’s Northeastern University.
During the late 1990s, the richest 20% of Americans owned the lion’s share of stock, enjoyed an outsize portion of the paper profits, and were responsible for a disproportionate amount of consumer spending, Greenspan said. But the same households bore the brunt of the market’s fall since March 2000, and reacted by curbing spending, he said.
Ordinarily, a sharp drop-off in spending would have been disastrous, setting off a vicious cycle of production cuts, layoffs and plummeting demand. But no such drop occurred because the bottom four-fifths of Americans--those with moderate incomes--kept on buying.
“Moderate-income households have a much larger proportion of their assets in homes, and the continuing rise in the value of houses has provided greater support for their net worth,” Greenspan said.
There’s nothing high-tech or New Economy about that. In the end, it is ordinary Americans buying routine goods and services who have salvaged the economy from the damage of the dot-com bust and telecom collapse.
