Decline in 2001 labeled mild

But data indicate recession recovery is going to be weak

March 29, 2002|By William Patalon III | William Patalon III,SUN STAFF

The recession of 2001 is proving to be the shortest and shallowest on record. And the rebound may be one of the weakest, economists said in response to a government report released yesterday.

The U.S. economy grew at a 1.7 percent annual pace in the final three months of last year, the Commerce Department said. That was the second time the government had boosted its estimate of fourth-quarter growth, initially pegged at 1.2 percent.

The revision virtually cements the third quarter - when gross domestic product fell 1.3 percent - as the only negative quarter the U.S. economy saw last year.

That's good news since it makes last year's recession one of the mildest ever, according to economists, who already have dialed up their growth forecasts to 4 percent for the current quarter and 3 percent for the second three months of this year. But what isn't so great is that U.S. economic rebounds have historically been much stronger than what's expected this time, meaning there are some issues to worry about in the months to come, according to economists.

"If you don't fall as far, you don't bounce [as] high," said Steven A. Wood, chief economist for FinancialOxygen Inc., a financial-services research firm based in Walnut Creek, Calif., and an analyst who terms last year's downturn as "the recession that wasn't."

Said Wood: "The first year of an economic expansion is typically around 6 to 7 percent [growth]. This year will likely be half that."

The health of the $9.5 trillion U.S. economy is chiefly measured through the rise, or fall, of its gross domestic product, or GDP, the value of goods and services produced at home. Historically, to be labeled a recession, GDP has to decline in two or more consecutive quarters.

But these newest Commerce Department figures show these conditions weren't met, even though the National Bureau of Economic Research says there was a recession last year: GDP grew at a meager 0.3 percent clip in the second quarter, fell 1.3 percent in the third quarter, and then rebounded to expand at 1.7 percent in last year's final three months.

"The recession is over," said William Sullivan, senior economist at Morgan Stanley Dean Witter & Co., in New York City. "This is paving the way for the economic rebound that's taking place this quarter."

To have such a sharp turnaround from a downturn is by itself surprising. But that the rebound started in the month after the Sept. 11 terrorist attacks on New York and Washington makes this "recession that wasn't" even more intriguing, experts say.

FinancialOxygen's Wood said three unusual factors combined to fuel the economy's resurgence. Each factor involved consumer spending, which drives two-thirds of the American economy:

The automobile sector, where fearful automakers resorted to such tactics as zero percent financing to keep car and truck sales from plunging off a cliff. Instead of merely averting a sales slowdown, the incentives incited a buying stampede by consumers who shrugged off fears of life under terrorism to snag unprecedented deals on that new car or SUV.

An environment of ultra-low interest rates. Federal Reserve policy-makers cut short-term rates 11 times last year, with several of the cuts coming after Sept. 11. Long-term rates dropped, too, to a 40-year low, in fact. That caused homebuying to surge, and spending on home-furnishings, hardware, appliances and services to spike, Wood said.

A trifecta of forces that stuffed extra money into the pockets of consumers. Low interest rates touched off a boom in home refinancing, which cut mortgage payments and gave consumers money to spend elsewhere. The one-time federal tax rebate gave consumers hundreds of more dollars. And the steep decline in energy costs slashed prices at the gas pump, and made it cheaper for consumers to heat their homes. All told, it was like a large wage increase.

The currently recovery is hardly fragile, but won't likely accelerate any time soon. Corporate profits aren't surging as they usually do after a recession, so companies are stingy about hiring, and perhaps interested in continuing to cut payrolls. With continuing job losses, consumer sentiment - currently on the march - could retrace its steps, dampening that all-important consumer spending.

Fortunately, there's little sign of inflation, which usually surfaces after long stretches of growth, when the economy may overheat. With no inflation fears, the Fed can keep interest rates low and nurture the expansion.

Bloomberg News contributed to this article.

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