The U.S. economy -- the world's largest -- is in recession. That pronouncement has come from a prominent group of U.S. economists that monitors periods of expansion and contraction. The group, the National Bureau of Economic Research, said the downturn began in March and was aggravated by the 11 September terror attacks. But analysts hold out hope that economic recovery could begin early in 2002. In this report, RFE/RL correspondent Mark Baker looks at the group's findings and the impact the U.S. downturn is having on the rest of the world.
Prague, 28 November 2001 (RFE/RL) -- It's no secret the U.S. economy has been slowing since at least the end of the year 2000. But this week, a group of leading U.S. economists dared to use the "R" word -- recession -- for the first time in years.
The group, the National Bureau of Economic Research, said in a report released on 26 November that according to a broad mix of indicators, U.S. economic activity peaked in March and has since been in recession. The NBER -- a nonprofit, nonpartisan research group based in Cambridge, Massachusetts -- is the recognized arbiter in the U.S. of when recessions begin and end.
The NBER said the March peak marked the end of 10 years of continuous economic growth, the longest period of unbroken expansion the group has monitored.
The NBER defines the start of a recession as the moment an economy stops expanding and begins to contract. The group considers a wide range of economic indicators, including employment figures, real income, and manufacturing output in making its determination.
That definition is broader than the more traditional formulation used by the U.S. Commerce Department and others -- that an economy is in recession if gross domestic product, or GDP, declines for two consecutive three-month periods. GDP is a crude measure of an economy's size, adding up the total amount spent by individuals, companies, and the government on goods and services in a given period.
By the Commerce Department's standard, the U.S. is technically not yet in recession. The department says GDP in the U.S. shrank in the third quarter of the year (July-September) by 0.4 percent, following growth of 0.3 percent in the preceding quarter. Figures for the last quarter of this year won't be published until January.
The NBER report did not say what prompted the recession but did say the 11 September terrorist attacks shocked the economy and may have helped turn what would have been merely a mild downturn into a full-fledged recession.
James Knightley, an economist at ING Barings investment bank, traces the slowdown to last year when businesses -- flush with excess inventory following a five-year buying spree -- cut back on purchases. The cutbacks rippled through the economy, hurting corporate earnings and stock prices and ultimately sparking job losses and a deterioration in consumer confidence. Knightley says: "We started seeing growth start to weaken well into late 2000 and early 2001, and it sort of gradually continued through as the equity market weakness sapped consumer confidence. We started to see a slowdown in spending in that area. And then obviously the events of 11 September added another shock to the system, as well. So we saw a further lurch downwards in consumer confidence and manufacturing confidence."
The NBER pronouncement was bolstered yesterday by a new report showing consumer confidence in the economy fell to a seven-year low in November as individuals continued to react to the September terrorist attacks and to prospects of further job losses. The report was issued by the Conference Board, a U.S.-based nonprofit research group whose findings are closely watched by Wall Street and U.S. economic officials. Spending by private individuals accounts for approximately two-thirds of the entire U.S. economy.
U.S. President George W. Bush used news of the recession to push his plan to reduce taxes. He told reporters on 26 November that he is confident the economy will turn around: "That tax-relief package is going to be part of an economic recovery package that will make sense for the long term of the country. We've got low interest rates. We've got reasonable energy prices. We've got good tax policy in place. We've got the framework for economic recovery."
The NBER did not say how long it believes the recession will last, but previous recent economic downturns in the U.S. have lasted for an average of just under one year. That would mean the recession could be over as soon as early next year.
This is consistent with Knightley's predictions. He says recent moves by the U.S. federal government to inject money into the economy through tax cuts -- and by the U.S. central bank, the Federal Reserve, to lower interest rates -- will spur a recovery:
"We -- sort of -- are looking for a rebound starting early next year. I mean, we have some huge levels of fiscal easing, with the tax rebates that were introduced earlier this year. We've also had a huge level of monetary easing from the Federal Reserve. So [this monetary policy and the easing we've seen] should lead to a rebound later next year."
The immediate outlook may be less favorable for the economies of the European Union's 12-nation euro-zone and, by extension, for Central and Eastern Europe. Despite pronouncements earlier this year by EU officials that the euro-zone is largely immune to economic events in the U.S., the downturn in the American economy has been felt strongly in Europe.
Economist Stefan Schneider at Deutsche Bank in Frankfurt explains: "We have seen already the effect [of the U.S. downturn] in terms of weaker export growth. Also, we have seen a strong slump in business confidence, which obviously reflects the overall global business environment, which has been worsened due to the weaker growth in the U.S. So it has actually quite a substantial import."
ING Barings' Knightley agrees and points out that the U.S. economy accounts for more than a quarter of global economic activity: "When you have such a huge effect from the U.S.,... it will eventually [go] through. The U.S. accounts for over a quarter of the global economy. When you have such a sharp downturn in a quarter of the world's economy, it's going to obviously have pass-through effects to other areas as well -- primarily through exports, but then the confidence-sapping effects of the downturn [are] going to have an effect, as well."
Germany is teetering on the edge of a recession, based on the standard of two consecutive quarterly declines in GDP. Schneider says continued strong domestic demand in countries like France and Spain may keep the euro-zone as a whole from sliding into recession.
But he says any sustained recovery in Europe will only come after the U.S. begins to recover.
(The NBER report can be read in full on the Internet at http://cycles- www.nber.org/ cycles/november2001/recessnov.html)