Real Recession, Real Recovery
Wesbury, Brian S.
"REAL RECESSION, REAL RECOVERY" BY BRIAN S. WESBURY lot of people may be wondering if Arthur Andersen audited he late great 2001 recession. In November, the National Bureau of Economic...
...And U.S...
...Each of these could reduce underlying growth...
...When growth trends are strongly positive—as they have been throughout the past two decades—Fed policy mistakes have much less impact...
...As can be seen in Genetski's charts, in a strong growth environment, once a recovery gets underway, the economy goes into overdrive...
...Zero growth would be America in the 1970s and early 1980s, or Japan in the 1990s...
...And that in turn suggests the real lesson from 2001: that a recession during a technology boom may not look like a recession at all...
...In November, the National Bureau of Economic Research, the official business-cycle arbiter, announced the American economy's first official con-traction in more than a decade...
...REAL RECESSION, REAL RECOVERY BY BRIAN S. WESBURY lot of people may be wondering ifArthur Andersen audited he late great 2001 recession...
...But potential dangers—the new steel tariffs and other protectionist measures, worsening environmental policies, and telecommunications regulation—still lurk...
...The interplay of business cycles with underlying productivity trends is key to movements in the economy and financial markets...
...The high-growth scenario represents the U.S...
...Milton Friedman taught us that monetary policy is the primary cause of cyclical economic swings...
...On the other hand, when underlying growth trends are negative, Fed screw-ups have much more painful, longer-lasting results...
...GDP is actually a poor measuring tool for recessions...
...Nothing could be better...
...Even then, the normal lag between Fed action and economic reaction is 6 to 9 months...
...More importantly, the idea that a wimpy recession means a wimpy recovery could not be more wrong...
...However, because Japan won't fix its high-tax environment, the underlying trend will not improve.The upside for both its economy and its stock market remain limited...
...Nonetheless, in the late 1990s, many analysts argued that Fed interest-rate policy was no longer effective, because high-tech companies financed themselves with equity, and banks were awash in cash...
...Japan, for example, has finally taken steps to end deflation, a sign that the monetary cycle is beginning to turn upward...
...Here in the U.S., the monetary cycle has turned up, tax cuts have been implemented and productivity remains strong...
...After the economy fell off a cliff last year, many of those same analysts were still calling the Fed impotent, this time arguing that rate cuts alone would not boost growth...
...Exclude those two factors, and real GDP contracted in all four quarters of 2001...
...It was this strong trend line in productivity that kept the recession so mild...
...Even more to the point, industrial production plummeted 7.3 percent from June 2000 through January 2002, Brian Wesbury is chief economist at Grin Kubik Stevens &Thompson, a Chicago-based investment bank...
...That said, as the recession of 2001 shows yet again, the overall incentive structure in the U.S...
...corporate profits fell more than they have in 70 years, and an estimated 1.8 million non-government jobs vanished...
...The key lesson from this is that even when the actual economy moves in cycles around the trend, the force of that trend has a powerful effect...
...For example, during the 2001 recession, non-farm productivity grew by 2.7 percent, an astounding achievement for an economy experiencing such a large drop in output...
...government spending grew faster in 2001 than it has since 1986...
...By anyone's definition, that's a recession...
...Both cyclical and underlying trends point in the same direction...
...And for all of 2001, real GDP grew 0.4 percent, the first-ever recession year in which the economy managed to grow...
...Easy: Look at the underlying trend...
...But that still doesn't answer a key question:Why have recent recessions been so much less painful than their predecessors...
...But with revised data now in, it turns out that fourth-quarter GDP actually rose 1.4 percent...
...Even though the Federal Reserve started cutting rates on January 3, 2001, it was not until April or May that rates were low enough—under 4.5 percent—to have a real effect...
...Look for a 12,000 Dow and a 2,500 NASDAQ by the end of the year...
...But the Fed is not impotent...
...is poised to benefit more than ever from the international flow of ideas and capital...
...My mentor in business economics, Robert Genetski of Chicago-based Genetski Financial Advisors, developed the chart at left to explain this phenomenon, showing the different potential states of underlying economic activity...
...remains the most attractive in the world.With economic growth coming more from conceptual output than from old-fashioned industrial production, the U.S...
...Downside or up, monetary policy is still the principal cause of business cycles...
...Indeed, as the chart makes clear, a downward cycle on an expanding trend line may not result in negative growth at all...
...Negative growth would be the Soviet Union in the 1970s, 1980s and 1990s, or Africa for most of the past half-century...
...stagnating economy declining economy expanding economy — — business cycles underlying trend 16 THE AMERICAN SPECTATOR • MARCH/APRIL 2002...
...economy since the early 1980s...
...This is the impetus behind the recent recovery in Japanese stock prices...
...But instead of disproving the recession, what the data really show is the overwhelming strength of tech-driven productivity trends...
...Falling imports, for instance, indicating weak demand, actually increase GDP by "boosting" net exports...
...At the earliest, any serious signs of a turning point for the economy should not have been expected until the fourth quarter, which is exactly what happened...
...This provides the environment for a very strong recovery...
Vol. 35 • March 2002 • No. 2
