Recession Over?

Preliminary statistics for fourth quarter 2001 indicate that Gross Domestic Product (GDP) halted its slide and actually grew at a 0.2 percent annual rate. Though the increase is tiny and at risk of disappearing through subsequent revisions, the report still confounded analysts who had expected much weaker growth. We reported last month that key indicators from a survey of small business owners signaled that the worst was behind us. It now appears that they correctly called the recovery before most analysts.

Federal Reserve Board Chairman Alan Greenspan has shifted toward a cautiously optimistic view for growth prospects this year. In testimony before Congress in late January, he also indicated that the worst has past and moderate (not robust) growth is ahead. It appears that the Fed's policy stance of monetary easing (through a sequence of 11 interest rate cuts during 2001) to stimulate the economy has ended. Moreover, Greenspan indicated that he no longer believes a fiscal stimulus package is necessary to revive the economy, reversing his position taken back in October. All of this suggests that we have just experienced the mildest recession in the post World War II period.

What does the latest survey of those small business owners foretell? The National Federation of Independent Business (NFIB) monthly survey for December indicates the highest expectations since 1983 for improvement in the economy over the next 6 months. NFIB Chief Economist William Dunkelberg notes that when the outlook index swings this far into the positive, economic growth has followed without fail. However, hiring and spending plans of the survey respondents do not portend a strong recovery. Though they report that finding qualifed workers is still difficult, "it will take a sharp increase in sales to get firms to hire significantly more workers in 2002." Unemployment is likely to drift upward this year, toward the 6.0 percent level. Dunkelberg still sees an "L"-shaped recovery, similar to the one following the 1990-91 recession.

Another factor that will hold down growth in 2002 is the continued imbalance in the household sector regarding saving and consumption behavior. For the past year Dudley and McKelvey have been warning (and we have been reporting) that the personal saving rate is unsustainably low given the declines in household net worth. Saving behavior is influenced by wealth. As wealth grew with the rise in equity markets in the late 1990s, the saving rate plummeted. But the declines in equity markets since mid-2000 have yet to trigger a substantial rise in the saving rate. There is another shoe waiting to drop (in the form of additional consumer pullback). The Goldman Sachs economic research group estimates that personal saving was about 1.5 percent of disposable income in the third quarter of 2001. This was only slightly above the 0.8 percent low reached in the first and third quarters of 2000, and is about 2 to 3 percentage points below the level they estimate to be consistent with net worth. So, unless equity markets mount a sustained rally, consumer spending will be fighting a steady headwind this year as households further bolster their saving behavior.