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How Deep is US Recession? - 2001-10-29


The powerful U.S. economy, the world's largest, has been experiencing a record 10 plus years of continuous expansion. But economists are increasingly convinced that the expansion came to an end even before the shock of the September 11 attacks on New York and Washington. Experts believe if the economy has entered recession, it will be relatively shallow and of short duration.

Between 1992 and 2000, the U.S. economy was the envy of the world. Growth in the 1990s averaged 4 percent a year. Twenty-two million new jobs were created. Inflation and unemployment stayed low and productivity - output per worker - soared due to innovations in information technology. It was called the new economy.

But as early as one year ago there were signs that the business cycle - the normal ups and downs of economic activity, was still a fact of life.

Five years of double digit gains on Wall Street came to an abrupt halt in early 2000 as the dot com, Internet bubble burst. In the high tech sector, share prices of many companies have fallen by 90 percent. This year there have been dozens of high-profile bankruptcies and tens of thousands of jobs have been lost.

Michael Dell, the head of the personal computer company that bears his name, says his industry is only now working through excess inventories. "What happened is that there was so much excess equipment that had to be absorbed and worked through, that only now we seem to be past that and the situation may be improving," he said.

On Wednesday the Commerce Department is expected to report that output gross domestic product, GDP, declined in the July to September quarter by up to 1 percent. That would be the first quarterly decline in eight years. To be a full-fledged recession output will have to decline for two consecutive quarters. The last U.S. recession was mild, lasting from mid-1990 to March 1991.

William Esrey, the chairman of Sprint Communications, sees parallels between today and 1990. "In 1990, when Saddam invaded Kuwait in August and sent the economy into a tailspin, from then until the next spring, consumer confidence fell by about half," he said. "The [stock] market had a severe correction, down about 17 percent to the trough. I don't know if there are going to be parallels or not. We don't know how consumer confidence is. It is probably going to fall. We won't know by how much until that data is out later this month. The market now has had a correction of 14 percent. But things in 1991 rebounded fairly rapidly from that point as the economy got together."

Ninety-seven percent of the chief executive officers of the 100 largest U.S. companies say they believe the economy is in recession. They say job creation has turned to job elimination and the unemployment rate will rise steadily to up to 6.5 percent of the labor force (from the current 4.9 percent).

Sandy Warner, head of JP Morgan Chase, a leader in U.S. banking, says, "There will almost certainly be increased credit problems arising out of recession. There always are. But the banking industry has never been stronger going into it. It is much better prepared in terms of the diversity of its risk."

While business leaders say a recession is at hand, there is considerable residual economic strength. Auto sales in October are likely to be at a record high. Consumer confidence remains intact.

The Federal Reserve, the U.S. central bank, has been aggressively cutting interest rates all year to head off recession. Another rate cut is expected on November 6.

There is no consensus on how long this downturn will persist. There is debate about the impact of the proposed $100 billion stimulus package now working its way through Congress. There is also debate about whether the eventual recovery will be sharp or gradual. Most experts say that upturn is likely by the middle of 2002.

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