The Recession Spectator
Reynolds, Alan
THE RECESSIONSPECTATOR by Alan Reynolds We've Been Here Before How the current "slowdown" compares to 1990. How would we know whether or not the economy is in or near a recession? Consensus...
...As we learned in 199o-91, forecasts are a lagging, not leading, indicator...
...Esti-mating the real interest rate by subtracting changes in the consumer price index (less energy), the real funds rate averaged 2.9 percent in 199o, 1.1 percent in 1991 and o.3 percent in 1992...
...Only after the recession ended in May 1991 did the Fed finally begin to seriously reduce interest rates...
...Current evidence that we are precari-ously close to recession, or already in one, is at least as compelling as comparable fig-ures at the onset of the last downturn...
...The high rate crunch-es lending and rewards hoarding of cash...
...An inverted yield curve is another pow-erful leading indicator...
...Last December it fell below 44, a clearly reces-sionary level...
...As someone who has been a Blue Chip forecaster, how-ever, this did not fill me with confidence...
...After the modest Jan-uary 3 easing, the real funds rate was still about 3-5 percent...
...It was not until late in September of that year that 58 per-cent of Blue Chip forecasters finally issued a cautious warning of recession...
...On September 19,1990, Greenspan said "the probability of a recession" within six months had "declined to about 20 per-cent...
...Banks would lose money paying high short-term rates on GDs while lending long-term at lower rates...
...Last year, the lead-ing index fell by nearly i percent for eight of the months from January to November...
...Repeating such timid gradualism today could make things worse...
...The index of leading indicators gave lit-fie waming before the 199o recession, falling in only three of the ten months before the economy tipped down...
...vey of the National Association of Pur-chasing Managers dropped to 47...
...When the Fed holds short-term interest rates higher than the rates on ten-year bonds, as it has been doing lately, companies find it difficult to roll over old debts or get new loans...
...Consensus among forecasters...
...It did that in November 199o, but three months late and much too slowly...
...In 1990, as Iraq invaded Kuwait, oil suddenly leaped from $16.48 in June to $35.47 in October...
...For several years the Blue Chip forecasting consensus had been pre-dicting a recession...
...If production and sales keep shrink-ing for another three months or more, that is no "slowdown...
...In 2000, oil was $34.40 in November, up from $12.94 two years before...
...On January 3, the Fed cut rates by half a point...
...Alan Greenspan was even slower to take notice...
...In December Bill Clinton remarked that "49 of 50 Blue Chip fore-casters think economic growth will be 2.5 percent or better next year...
...The "slowdown" at the close of 2000 resembled that of mid-199O in many ways...
...Brief market dips, even one as sudden as October 1987, do not reliably foretell recession, but broad stock indexes falling below the level of a year earlier-as they did in 2000-are a powerful predictor of recession...
...Since the stock market held up relatively well in 199o, leading indicators gave a more muted warning in 199o than in 2000...
...But there may be considerable risk of doing too little too late...
...From May to July 199o, consumer confi-dence fell more than five points, providing some warning of trouble...
...Last year, that same index fell fourteen points from Sep-tember to December...
...The interest rate the Fed sets on bank reserves is still higher in real terms, adjust-ing for inflation, than a decade ago...
...Waiting to do any-thing until a majority of forecasters finally concede that a recession is undeniable would be very risky...
...THE RECESSIONSPECTATOR by Alan Reynolds We've Been Here Before How the current "slowdown" compares to 1990...
...It cut rates by a full percent-age point in December 1991, and kept on cutting (a total of two dozen times) until the rate finally hit 3 percent in September 1992...
...And though the recession had already begun, it was not until January 2, 1991, that President Bush demurely recognized "a slowdown economically in this country, if not a recession...
...In July 199o, the surALAN REYNOLDS is director of economic research at the Hudson Institute, and senior editor of the Institute's magazine, Ameri-can Outlook...
...The expectation of a gradual decline in interest rates cre-ates a perverse incentive for people to post-pone interest-sensitive investments...
...The gap between yields on BAA corporate bonds and 30-year Treasuries are a measure of finan-cial risk -also reached 2.5 percentage points at the end of last year, wider than the 1.7 point risk spread in July 1990...
...The 199o recession struck betWeen July, the peak of economic growth, and August, the plummet...
...There is no plausible danger that action on interest rates or tax rates could somehow be too swift and bold...
...To estimate the odds of that happening, we have to look at leading indicators...
...To restore prosperity today, there is no need to choose betWeen lowering interest rates and lowering tax rates, since doing both would be ideal...
...An obvious parallel betWeen 2000 and 1990 is the uncomfortable blend of higher oil prices with a high fed funds rate...
...54 February 2001 . The American Spectator...
...Yet in July 199o main-stream forecasters were newly confident of a soft landing in 1991, predicting econom-ic growth of 2.2 percent...
Vol. 34 • February 2001 • No. 1
