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The year 2001 has seen an unprecedented 11 interest-rate cuts. While there is no doubt the U.S. economy has descended into recession, questions do arise as to when it began -- and when it will end.
If Sept. 11 was the event that pushed the economy into recession, why all the recent talk that March was the beginning? And after 11 interest rate cuts, why hasn't the economy responded?
The traditional definition of recession is two consecutive quarters of economic contraction. The third quarter of 2001 was the first interval to show any contraction. However, the National Bureau of Economic Research (NBER) pegged the onset of recession as March, when employment and other economic activity topped out.
Much of this discussion about the exact beginning is a matter of different measuring sticks. Think back to the last time you were ill. When did it start? Most of us would define being ill from the point at which we felt queasy and made a beeline for the nearest restroom. The NBER would likely define it as commencing two weeks prior when we unknowingly shook the hand of someone that had a cold and initially caught the bug.
A similar debate arises about the point at which the economy will emerge from recession. Like fighting off a winter cold, pinpointing the turning point to recovery may be difficult. Though the timetable is likely to be seen only in hindsight, there is little doubt the economy will inevitably rebound.
Alan Greenspan has been administering regular doses of interest rate medicine, without which the economy certainly would have been well into a recession, as traditionally defined, prior to Sept. 11. The cumulative effect of the interest rate inoculation may not yet have the economy springing to its feet, but has averted potentially lower lows thus far. A well-founded belief exists that without the events of Sept. 11, recession may have been avoided altogether. After all, it was only then that the mainstay of consumer spending, the strength of which served as a buffer from recession until that point, began to waver.
The Fed has reserved the option of injecting additional stimulus until signs of economic recovery are more than "preliminary and tentative," a phrase used in Tuesday's post-meeting statement to quell optimism that an immediate recovery is at hand. Essentially, the doctor has bellowed, "Get back in bed, you're not better yet!" Getting better will involve more tangible evidence of sustained consumer spending and increased manufacturer production, rather than the upbeat, but fleeting, future expectations of consumer confidence surveys.
This evidence may take awhile to materialize. Not only were October retail sales revised from the initial 7.1 percent jump to a 6.4 percent increase, but November retail sales posted a sharper drop-off than expected. Although initial unemployment claims came in below expectations for the week of Dec. 8, the more telling trend is the four-week moving average. This will continue to get quite a bit of attention leading up to the next economic doctor's appointment January 29-30.
Although the economy will continue to show signs of recovery, more medicine may yet be in store. A clean bill of economic health will remain elusive until the nagging cough that is unemployment and weak demand improves.
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