EconSouth (First Quarter 2003)


What’s Different About This Recovery

Wn reflecting on 2002, many who closely follow the nation’s economy recognize that we probably witnessed a new economic phenomenon last year. I’m talking about the concept of a “stealth recovery.” Basically, what this means is that while gross domestic product grew in all four quarters of 2002, the uneven performance of the U.S. economy last year didn’t make many people feel like we were steadily recovering from the recession that began in 2001. That’s because a number of the economic developments that we typically associate with a recovery didn’t occur.

Consumer spending never declined
For one thing, consumer spending never really declined during the recession. As a result, we haven’t witnessed the boom in consumer spending that we would typically expect to see in a recovery period.

In most recoveries since World War II, production has typically surged as consumers came back into the marketplace and bought big-ticket, credit-sensitive goods, like cars or refrigerators, that they had deferred purchasing during the downturn. The rebound in consumer spending is usually an important signal to businesses because it tells them first to begin building inventories and then, if consumer demand keeps growing, to increase spending on capital equipment and facilities, recall laid-off workers or begin hiring.

Photo of Jack Guynn

But consumer spending did not decline during the recent downturn in 2001; in fact, on average, it grew more than 2.5 percent over the last two years. And in interest-rate-sensitive sectors such as home building and automobiles, consumer spending grew much faster. Now, to be sure, I’m glad consumers stayed the course during the recession, but for most businesses, the lack of a surge in consumer spending has made it very difficult to pick up, or count on, a strong growth trend in the consumer sector.

The other signals we look for in a recovery weren’t particularly resounding in 2002 either. Manufacturing activity picked up steam in the first half of the year, then slowed again. Investment in equipment and software showed some signs of life in the fall but stayed mostly flat over the year. Office and industrial vacancy rates increased. And layoffs, plant closings and balance sheet adjustments continued unabated in 2002, probably accounting for some of the anxiety and uneasiness about the recovery. In short, as recoveries go, the one we witnessed in 2002 was somewhat less than awe-inspiring.

Considering 2003
As for 2003, if consumer spending and housing hold up and business profitability continues to improve, there is every reason to believe that gross domestic product will grow between 2.5 and 3 percent — a slight improvement over last year. One important distinction, though, is that growth ought to be more broad-based in 2003 and less concentrated in particular sectors such as housing and autos. As in 2002, I don’t believe that inflation will be a source of uncertainty for consumers or businesses in 2003.

This year, I think we’ll finally begin to see results from the rounds of layoffs and investment deferments we’ve witnessed the last few years. In 2003, instead of the resounding starting boom we usually expect from the consumer sector, businesses should see continued improvement in profit growth. When that happens — and firms see that profits are sustained and we get beyond much of the uncertainty associated with various geopolitical issues — I think businesses will start shifting their priorities away from short-term cost reductions and toward a longer-term focus on product innovation and new sources of revenue. This shift should show up in greater investment spending and growing employment.

By Jack Guynn, president and chief executive officer of the
Federal Reserve Bank of Atlanta

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