WILLIAMSBURG, Va. -- The textbook recession is a decline in total output, income and employment, usually lasting between six months and a year and marked by widespread contractions in many sectors of the economy.
It begins with a decline in demand for durable goods like autos and a fall in home sales and new construction. Business inventories pile up and firms respond by cutting output and new investment in plant and equipment. Unemployment rises as firms become convinced the downturn is more than a blip.
Today's facts don't conform to this picture. They reflect instead the popping of the high-tech bubble. Federal Reserve Chairman Alan Greenspan has worked to ensure that the tech contraction does not spread throughout the economy. His task is to buoy consumer spending until the tech sector and its dependent industries right themselves.
Gross domestic product, which measures the nation's total output of goods and services, grew at a 1.3 percent rate from January through March, up from 1 percent in the last quarter of 2000. Consumer spending continues to confound pessimists who point to historically low household saving and very high consumer debt. The housing market remains robust, clearly because of the Fed's earlier interest rate cuts.
Another very good sign is declining business inventories. This usually occurs at the end of a downturn as firms adjust to lower demand. The last time inventories declined was the summer of 1991 as the previous recession was ending. Bare shelves can set the stage for stronger future growth.
On the other side of the ledger, new business investment has fallen for the past six months. But this contraction is heavily concentrated in information, which still accounts for no more than 7 percent of the U.S. economy.
The wild card remains the American consumer.
Consumer confidence weakened in April, and expectations of a worsening economy can become self-fulfilling if they cause consumers to postpone current spending and non-tech businesses to shelve their investment plans.
The unemployment rate of 4.4 percent in May, down from 4.6 percent in March, so far is modest by historical standards. The damage remains concentrated in the manufacturing sector. During the fairly mild recession of the early 1990s, unemployment rose from 5.3 percent to 7.6 percent. A similar contraction today seems unlikely.
Will we see another rate cut in June? Maybe, but the days of consecutive half-point cuts are likely behind us. Barring some unforeseen financial shocks from abroad, the Fed is likely to adopt a wait-and-see approach. After all, the five previous cuts are a potent medicine that is just getting into our system.
David H. Feldman is a professor in the Department of Economics at the College of William & Mary.
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