Short recession projected due to federal spending

Economist credits billions being spent in Sept. 11 aftermath

November 15, 2001|By William Patalon III | William Patalon III,SUN STAFF

Though the United States has clearly dropped into recession, government moves forced by the Sept. 11 terrorist attacks virtually guarantee that the downturn will be milder than that of 1990-1991, a local think tank's chief economist predicted yesterday.

Maryland should suffer less than it did in the last recession and benefit more from the rebound, added Anirban Basu, chief economist at RESI Research & Consulting, a Towson University think tank.

The promised infusion of billions by the federal government, in tandem with the central bank's aggressive interest-rate-cutting campaign, should shorten the recession and hasten the rebound this time around, he said.

"This recession ... is similar but slightly less severe in magnitude," Basu told the audience at RESI's annual economic outlook conference.

A recession is generally defined as two consecutive quarters of a decline in gross domestic product, the total value of goods and services made in the country. Although GDP has only fallen for one quarter - a 0.4 percent decline in the July to September quarter - many economists believe the country is in recession.

In the early 1990s, like today, the Federal Reserve was able to slash short-term interest rates, hoping to revitalize borrowing and spending by both companies and consumers.

But when the last recession began, the federal government was still running huge deficits, which crimped its ability to prime the U.S. economy's pump by injecting billions of extra dollars into the economy.

This time, however, Congress has approved $40 billion in emergency funds, the airlines are set to get $15 billion in bailout money and the Bush administration and lawmakers are haggling over a recovery-spending package whose expected worth is $75 billion to $100 billion.

All that spending, along with 10 rate cuts by the central bank, is "a powerful antidote" for an ailing economy, Basu said.

The upshot: While U.S. unemployment will vault to 6.6 percent or 6.8 percent from its current 5.1 percent, that's well below the 7.7 percent peak of the last recession, Basu said.

With the vigor of the federal government and central bank's responses, Basu predicted a sharp "V-shaped" recovery, instead of the slower and more subdued "U-shaped" rebound that he believed the country would have endured before the tragedies prompted the rate cuts and cash injections.

The American economy will begin to revive in the second half of 2002, making 2003 a very strong year, Basu said.

This forecast is good news for Maryland, Basu said. The 1990-91 recession hurt most of the state's key industries, making it "two times as long and three times as deep" for Marylanders.

There is already a heavier emphasis on defense and security, he noted, and the focus will be on the kinds of defense products and services that are Maryland's specialties.

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