Chapter 2: Bushcapades:
IS THE U.S. IN A RECESSION ?
Submitted April 2, 2001
POLITICAL CONTEXT
Presidential Glory: The Honeymoon Continues
President George W. Bush’s honeymoon is to be nice, nice. Now, it’s not polite to attack the President, or politic. He is talking moderate, and governing right wing. He is dominating the daily national news in the media fishbowl, and he is enjoying it so far. He has the power, and he is exercising authority more effectively than his detractors expected. Underestimated again.
Bush has made implementing the tax cut his top priority. Cutting the budget, while enhancing military and education spending is the rest of the focus for his efforts with the Congress. Of course, all of this assumes that the economy continues to generate so much federal tax revenue that he can keep his commitment to pay down the national debt while underwriting Social Security and Medicare.
Bush wants to re-create the United States of 1955, when we were still a God-fearing country that respected family values, authority, and reaping the benefits of the American Dream in the private sector through hard work.
While Bush has been very cautious about using the word “recession” himself, his Vice President, Dick Cheney, is who introduced the concept into the public mindset on a Sunday tv talk show on December 3rd. By painting a picture of how bad it was before they came into office, the new GOP administration hoped to pin the blame for the emerging economic troubles on Clinton. Wait a minute. When Bush Senior left office, unemployment was over 7 percent, 3 percent worse than now. Clinton came to office and said “It’s the economy, stupid.” Bush Junior comes into office complaining that after the unprecedented almost eight years of prosperity, the economy may be in some trouble.
His father called it “voodoo economics”, but this President Bush is so devoted to Reagan philosophically that he is limiting himself to promoting a bigger tax cut and hoping the Fed continues to cut the prime lending rate until it does some good. He even uses bad news to argue his case for a monstrous tax cut. His greatest hope is that the tax cut package will have enough of an impact to build both consumer and producer confidence and restimulate the economy to the sustained growth levels of most of Clinton’s two terms.
TURMOIL UNDER THE SURFACE
Meanwhile, there are major new examples of institutional destabilization which are severely affecting masses of people. In California, energy shortages have been so significant that local communities have already experienced rolling blackouts.
Throughout Europe, fear of the spreading foot and mouth animal disease has caused major food disruptions which will have far-reaching negative economic consequences even beyond the substantial tourism and hospitality industry. These types of systemic dislocations make it harder for economic sectors to be reliable.
MONETARY POLICY
Nothing is more important to financial markets than the Federal Reserve Board’s decision to change monetary policy.
Economic historians fiercely argue about whether the Fed could have used its rate adjustment powers more aggressively to prevent the Great Depression of the 1930s. Information now is much quicker, although many of the government’s reports have institutional lag times, which can be potentially detrimental.
The federal funds rate is important because it establishes the relative cost of money. When it changes, it has a ripple effect which affects the relative value of other things, forcing instability and creating readjustments with additional economic activity.
“How the Federal Reserve Works
From USA Today, March 21, 2001:
“How the Federal Reserve influences the economy through monetary policy:
• The Federal Reserve affects the economy by raising or lowering the target for a key short term interest rate, the federal funds rate. That is the rate at which banks lend money to one another for overnight loans. The banks need the money to make sure they maintain cash-reserve requirements.
• When the Fed lowers its target rate, it does so by buying Treasury securities; that puts more money into the banking system, increasing the amount available to lend to businesses and consumers. That allows banks to lower their lending rates. The prime rate at major banks typically falls soon after the Fed announces an interest rate cut.
• Although there’s generally no direct relationship, those lower bank rates eventually percolate through credit markets to push down the cost of car loans, adjustable-rate mortgages, business credit and other borrowing.
• Lower interest rates for loans usually encourage businesses to borrow and invest while consumers are more likely to spend. That helps give the economy a boost.
• The bad news is that the trickle-down effect of interest rate changes takes time – usually 6 months to 9 months from the time the Fed moves rates up or down – to when the effect is fully felt in the economy. That means its unlikely you’ll feel the recent half-percentage point cut before autumn.”
A year ago, the Federal Reserve Board was looking at an economy which had been so successful for so long that the central bankers were afraid the economy was going to overheat, and become inflationary. To stall the overheating, the Fed raised federal fund rates six times, for a total of 1.75% to 6.5%.
The result the Fed wanted was reduced but sustained growth. They succeeded in slowing the economy; now the question is: can they find a new equilibrium that will sustain growth?
Before January 3rd, it was unusual for the Fed to change the rate by more than .25 percent. Then the Fed dropped the rate by .5% in between meetings, from 6.5 to 6.0, which was so unusual that to many it signaled that the Fed was “panicking” in response to the previous day’s stock market tailspin as well as significant economic declines in December.
Then at its regular meeting January 31st, the Fed decided the economy had become too tight, and needed another half point drop, according to their minutes.
For all of February and early March, stock market economists were calling for the Fed to lower the rate again, before the Fed’s next meeting. As the meeting approached, expectations for another rate drop heightened.
When the Fed met March 20, it was following one of the worst weeks in U.S. stock market history. Even though the Fed had already dropped the rate one percent in January, news stories forecast the Fed might drop the then-current 5.5 percent rate a range of another half, three-quarters or even another whole percent. As reputable an analyst as former Fed Governor Wayne Angell was predicting a drop of an additional whole percent.
Then as the Federal Open Market Committee was meeting, the stock market climbed, in hopes of aggressive Fed action. When they heard the Fed had decided to only cut the rate a disappointing half percent, the Dow dropped decisively away from the 10,000 mark.
The Fed half point rate cuts have caused diminishing impacts on the stock market:
January 3: 6.5 to 6.0: significant impact in part because it was unexpected; faded impact after two weeks.
January 31: 6.0 to 5.5: anticipated; may have had a positive impact the week before, but little after.
March 20: 5.5 to 5.0: more was hoped for; disappointment: Dow falls through the 10,000 mark.
While the debate continues about whether or not the country is in a recession, there is no doubt that the stock market has gone from bull to bear. The hope now is that the Fed will again drop the prime before the next meeting in early May.
The irony is that the Fed has limited this last cut to only a half percent with the high minded talk about paying attention to the larger economy and not just the demands of the stock market, while the one-quarter decline in stock wealth of $4 trillion during the past year is much larger than any rate cut’s impact on the potential for the banking system to expand the money supply.
The policy question becomes: Is there a credit crunch that a lowering of the federal funds rate will improve in terms of spending, lending and investing? Japan’s interest rate is virtually zero, and they know they are in a 10-year recessionary quagmire. Japan is the second largest economy in the world.
COMMENTARY ON INFORMATION LAG
There is an inherent lag between an event and the recognition of the event. The longer the lag, the less likely that the discovery of bad results can lead to a change in inputs that will affect the subsequent outcome. One of the problems with the U.S. economic system is that the government statistics come out weeks or even months after the events being described.
Only with real time information can appropriate responses be made in a timely way, and then evaluated. Then the next cycle of intervention can have the chance of being more effective. (See Platform for Change and Brain of the Firm by Stafford Beer for an example of a national real time decision taking system.)
BUSH URGED TO SPEED RELEASE OF KEY ECONOMIC DATA
By Jim Wolf
“WASHINGTON, March 26 (Reuters) - Gartner Inc. (NYSE:IT - news), a leading technology consulting company, called on President George W. Bush Monday to speed the release of U.S. economic statistics and to name a cabinet-level federal information officer to manage technology upgrades.
“Gartner, in a statement proposing eight initiatives ahead of a White House technology conference Wednesday, said Bush should ‘get serious’ about protecting computer networks from criminals and terrorists, promote privacy on the Internet and fund states' upgrades of election technology.
“’Why wait a week between the end of a month and releasing the Labor Department's unemployment figures,’ the Stamford, Conn.-based consultancy said in its statement.
“Gartner noted it took two to three weeks for the department's Bureau of Labor Statistics to report the month-ending consumer price index, a key indicator of U.S. economic trends.
“Worse is a gap of one to three years between collecting and reporting Census data. ‘Surely policymakers operating in a $10 trillion dollar economy should use a faster method of obtaining data on economic performance,’ Gartner said.
“The company, which says it advises more than 10,000 clients worldwide, also called for establishment of the legal and regulatory groundwork for fast adoption of wireless and ‘wearable’ technology, including monitoring the health and safety implications of ‘personal technology devices.’”
“But 70 percent of electronic government initiatives will fail because of poor planning, Gartner said. It said interoperability among federal agencies and state and local governments was lagging.
“To overcome such ‘e-government’ roadblocks, collaborative processes, budgets and policies were urgently needed, it said.
“Gartner predicted that e-government would eliminate the need for at least 30 percent of U.S. government agencies.
“’To manage this national technological seismic shift, the federal chief information officer should be a cabinet-level position reporting directly to the president,’ it said.
“Gartner predicted that 30 times more data would be ‘routinely captured’ about an individual Web surfer by 2004 than is currently captured. It urged new privacy protection laws to reassure shoppers that they could safely spend online.
“In his budget request for fiscal 2002, which begins Oct. 1, Bush asked Congress to boost funding for the Commerce Department's statistics-gathering agency by 18 percent, funds that would be used chiefly to improve the government's measurement of economic growth.”
WHAT IS A RECESSION ?
The term “recession” is a 20th century invention for politicians to describe how to regain control of the business cycle. As though there was a business cycle. But the term business cycle is only applied when the economy is contracting.
When a recession starts, what causes it, and how to get out of it are all questions that economists debate with little agreement. The U.S. economy since 1960 has experienced 6 periods of “recession”, defined as declining Gross Domestic Product: 1960-1, 1969-70, 1974-5, 1980, 1981-2, and 1990-91.
See table on ![[WWW]](http://wikispot.org/wiki/eggheadbeta/img/sycamore-www.png){kind=small}
http://william-king.www.drexel.edu/top/prin/txt/probs/reces3.html.
The positive part of the problem is the effect of new technologies. A recession is a time when old industry leaders fall by the wayside to more appropriate emerging technologies Eventually, these are so much more attractive that they come to dominate in the market.
Each recession forces a new beginning, what systems scientists call the bottom of the “s-curve”. So each recession is about developing and maturing technologies.
ECONOMIC INDICATORS OF A RECESSION
The jury is still out on the question of whether the U.S. is already in a recession. There are several recognized indicators of a contracting economy, and the numbers paint a mixed picture.
The almost instantaneous one would be the declining of the stock market daily averages: DOW Jones Industrial Average, calculated by the Wall Street Journal, the National Association of Stock Dealers Average Quotient (NASDAQ) Composite Index, and Standard & Poor’s 500. Repeated monthly declines would be strong indicators of a recession.
Two other operational definitions of intermediate range are three months of continuous decline of either the monthly measure of Consumer Confidence or the monthly Index of Leading Economic Indicators. Both are maintained by the business group known as the Conference Board.
Where the other indicators could be considered objective measures of actual activity, the Consumer Confidence indexes give a sense of people’s feelings currently, and their expectations six months into the future. Numbers are gathered during the first half of the month, and then reported on the last Tuesday of the month.
The Index of Leading Economic Indicators is a composite of ten indicators, any one of which is a forecaster of economic activity. They include: the spread between the 10-year Treasury and the funds rate, money supply (M2), average workweek in manufacturing, manufacturers’ new orders for consumer goods, S&P 500, average weekly initial unemployment claims, vender performance, housing permits, consumer expectations, and manufacturers’ new orders for nondefense capital goods.
One advantage of the weighted average is that the exaggerated variance of any particular indicator is buffered by the other numbers, so the index should be both more powerful and more sensitive than any individual number within the index.
The number is released a month after it happened, so there is a tremendous built in lag. Normally a trend of two monthly data points would not be noted until three months after it really started.
A fourth measure of recession is the rate of Unemployment. Traditionally people are aware of recession because there seems to be increasing unemployment. The number of new claims for unemployment is reported weekly. National, state and regional employment figures are reported monthly.
The fifth, and most delayed indicator is the two quarter drop of the Gross Domestic Product. Since the 3-month GDP is announced one month later, there is a four to seven month minimum lag behind the actual event. So it is a little late to do anything to intervene.
RESULTS OF FIRST QUARTER, 2001
The Stock Market: The Dow was at a high of 11,722.98 on 1/14/2000, 10,945.75 on1/3/2001, and now stands at 9,878.78 on the last day of March. The NASDAQ Composite Index, which includes more technology stocks, had a high of 5,048.62 on 3/10/2000, and at the end of March, 2001 is at 1,840.26. Standard & Poor’s 500 peaked a year ago at 1,527.46, and at the end of March is at 1,160.33. Each of these statistics confirms that the U.S. stock market is at least a bear market, defined as a 20% drop from the market’s high.
The Index of Leading Economic Indicators dropped –0.4 in October, -0.3 in November, -0.5 in December, rose 0.5 in January (because of cut prices for inventory remaining from poor Christmas/December retail sales), and then dropped –0.3 in February. The indicator has been more flat than declining over the past six months, and so does not indicate a recession.
Consumer Confidence has three indexes: (1) are you confident about the economy today?, (2) are you confident about the economy six months into the future? , and (3) a weighted average of (1) and (2).
Over the past six months, (1) “confident today” has shown a small decline but still seems relatively strong, perhaps because the numbers are so high above 100 (an arbitrary relative scale of 1985 being 100): September, 2000: 182.5, October: 176.8, November: 179.7, December: 176.1, January: 170.4, February: 167.1, March: 167.2.
It is the (2) “confident about six months into the future” that is the strongest indicator that the U.S. may well already be in a recession: September, 2000: 115.9, October: 108.4, November: 101.2, December: 96.9, January: 79.3, February: 70.7, and March: 83.6.
The slight improvement from February to March offers an example of just how flighty the stock market mass psychology can be. While the index climbed a strong 11.9, it only came back to January’s significantly lower level compared to even December. And yet, the stock market reacted so favorably that day that you would have thought it climbed to well above 100.
The national Unemployment rate was a respectable 4.0% in both November and December, climbing to 4.2% in January and February. These are strong, healthy numbers, and the main reason it can be argued that the U.S. is not in a recession.
But prospects for continued low unemployment are questionable. From a USA Today/Economy.com report on unemployment claims: “There is no question that labor markets are feeling the impact of a slower economy. The change has been gradual as jobless claims have risen much more slowly than they did leading into the 1990-1991 recession and the jobless claims/workforce ratio remains below the peaks seen in both 1991 and 1996.”
The economy is only beginning to see the ripple effects of the reality check with the dot com crash. Significant layoffs are expected in the stock exchange, financial services, advertising and tech support which had served dot coms with the hopes of future payoffs.
The key for the unemployment rate will be net new jobs created, which so far has remained positive.
The Gross Domestic Product has the long lag of at least three months. The big problem with the change in GDP as an indicator is that it lags so far between increments.
(The reason for the delay is that officials want to put off the bad news as long as possible. The term recession is now usually defined as a two quarter drop in the Gross Domestic Product. That definition of a recession popped out of William Simon when he was then-President Gerald Ford’s Secretary of Treasury in late 1974. The Commerce Department quarterly report showed a drop, and the press confronted the Secretary. In an effort to avoid the historic stigma implied in the label “recession” and hope that it was just a temporary weakness, Secretary Simon said, “Oh, no, it takes a TWO quarter drop to call it a recession.” Which is how the press & academia were given what has become the most widely used definition of a recession.)
While the Gross Domestic Product is not yet in the negative, the growing alarm reflects the significant drop over the past year: growth the fourth quarter, 1999: 8.3%, first quarter, 2000: 4.8%, second quarter: 5.6%, third quarter: 2.2%, fourth quarter: 1.0% - just readjusted down from 1.1%. The feeling is that first quarter 2001 will be reported as positive, but less than 1% GDP growth. If the GDP goes negative any quarter in 2001, the press will probably start arguing that we are already in a recession, and not wait for a TWO quarter negative drop. First Quarter 2001 GDP will be reported at the end of April.
Several other national indicators are showing signs of recessionary weakness. According to a USA Today/Economy.com report on the Fed Open Market Committee meeting analysis (3/22), “Mortgage and consumer credit delinquencies are quickly rising, as are personal bankruptcy filings. Corporate bond defaults are on the rise, as are rating downgrades. The amount of commercial paper outstanding of non-financial corporations is falling. This is a rare and worrisome occurrence indicating that investors are fearful that the bluest of blue-chip businesses may be having significant near-term cash flow problems.
“Investor psychology has shifted dramatically over the past year in which some $4 trillion in stockholder wealth, equal to 25% of such wealth, has been lost. Investors no longer believe that they will or can be bailed out. The speculative bubble prevalent in the equity market has been burst”.
When the Fed’s made their announcement on March 20th that they were lowering the federal fund rate by only a half percent, they justified that they couldn’t lower it more because they couldn’t let the stock market problems dictate what they were trying to do with the larger economy. But that logic falls apart when you compare the miniscule expansion of funds by banks in the past year with the massive $4 trillion contraction in stock market wealth lost.
Not all the news is bad. According to Brian Nottage of the Dismal Scientist (3/20/2001), “The continuing resilience in housing and the actual acceleration in auto sales vividly demonstrate that households are not nearly as concerned about the economic situation as Wall Street analysts suggest they are.
“If purchases of the largest items households buy continue at such a strong pace, the onus is on the doomsayers to prove that we are in the midst of a recessionary confidence spiral”.
Ironically, it appears that Inflation is so low that it is not an issue of justified concern, although scarcity of energy (gas and electricity) could accelerate inflationary pressures.
Other indicators which bear watching include: retail sales, the value of homes, computer sales, bank activity, the value of the dollar compared to foreign currencies, foreign stock markets, and the foreign trade deficit.
Bush is convinced that the Reagan tax cut exclusively led to Clinton’s prosperity, and conveniently forgets his father’s disastrous recession/budget deficits/tax increases (“Read my lips: no new taxes”) in between the tax cut and the prosperity. Bush has a one note drum called Tax Cut to solve all of the economy’s problems. Bush is in a race to implement the tax cut, in hopes that it can stimulate economic stability and growth.
Maybe the prosperity era was limited to Clinton. That is ancient history now. While Bush may not like some of the consequences of a contracting economy, it is the situation that defines him as President.
Only time will tell if the U.S. is already in a recession. It is not something the country finds out about overnight. It creates enough necessary economic disruptions that people are forced to do a lot of individual and group soul searching. And it takes time to work into a new stage of a revitalized economy.
OPTIONS FOR WHERE THE U.S. ECONOMIC SYSTEM IS HEADED
• Soft landing followed by Bush prosperity through 2008, a la Clinton.
• Rocky landing and sputtering recovery; unemployment 8%; with perpetually optimistic Bush re-elected in 2004.
• Hard landing with the sense of a long drawn out recession; unemployment over 10%; Bush, just like his dad, loses his bid for re-election to a Democrat named Clinton (Hillary Rodham Clinton).
• Hard landing that seems to become more, well, depressing; unemployment over 20%; specifically, continually dropping figures for employment and GDP for the U.S. and other industrial countries; Democrats elected in 2004 but they are just as unsuccessful.
• Hard landing followed by politically responsible work of the baby boomers to design and implement a system that works, as pictured in Ecotopia as an example of applied general systems theory.
References
- Bush urged to speed release of key economic data, Jim Wolf, Reuters, Washington, March 26, 2001, http://biz.yahoo.com/rf/010326/n26611961_4.html
- How the Federal Reserve Works, USA Today, March 21, 2001, A2
- Graph of Gross Domestic Product, including periods of recession since 1960, http://william-king.www.drexel.edu/top/prin/txt/probs/reces3.html.
- Fed needs bold move, Brian Nottage, Dismal Scientist, 3/20/2001, http://www.dismal.com/todays_econ/te_032001_2.asp
- FOMC meeting analysis, Economy.com, http://www.dismal.com/affiliates/framed/usa_today/gen_release.asp?r=usa_fomc_meeting
- Unemployment claim analysis, Economy.com, http://www.dismal.com/affiliates/framed/usa_today/gen_definition.asp?r=usa_claims
Ecotopia, Ernest Callenbach, Banyan Tree Books, 1975
Platform for Change, Stafford Beer, Wiley, 1975, 2nd Edition 1994 includes Reader’s Guide by Jon Li
Brain of the Firm, Stafford Beer, Wiley, 1981
