Many indicators must be studied while forecasting


By Michael Slotkin
A column for FLORIDA TODAY

According to the National Bureau of Economic Research, the longest economic expansion in American history (120 months) officially ended last March.

The bureau's Business Cycle Dating Committee uses a slightly different measure to define a recession than the popularly cited two consecutive quarters of negative gross domestic product growth.

The bureau focuses on changes in industrial production, employment, real income, and business and retail sales.

Moreover, the bureau report left little doubt about the impact of the Sept. 11 attacks on the U.S. economy, suggesting that the nation might have averted the recession had the attacks not occurred.

Prior to March, there were readily apparent signs that the U.S. economy was experiencing an inventory correction.

By the second quarter of 2000, the rate of inventory changes was decreasing, and by the fourth quarter of 2000, declines in fixed-business investment were being realized.

In the second and third quarters of 2001, both private and non-residential fixed investment decreased by about 10 percent on an annual basis. On its own, this "investment bust" might not have precipitated a recession.

However, coupled with declining growth in consumption attributable to Sept. 11, U.S. gross domestic product contracted by 1.1 percent in the third quarter of 2001.

Accordingly, declining business activity has ratcheted upward both the U.S. and Brevard unemployment rates. At the national level, the unemployment rate has risen from 3.9 percent in October 2000 to 5.7 percent last month, its highest level since August 1995.

Between October and November of this year, more than 400,000 Americans joined the ranks of the unemployed.

In Brevard County, a similar story is unfolding. From July to October (the latest month for which final data is available), Brevard's unemployment rate increased from 3.5 percent to 5 percent and the number of unemployed swelled to 10,682 in October from a July figure of 7,528.

In order to stimulate both consumption and investment, on Dec. 11 the Federal Reserve cut its federal-funds interest-rate target for the 11th time in the year. It was the fourth rate cut in the aftermath of the attacks.

For the year, that rate has fallen from 6.5 percent to 1.75 percent. As compared to the last U.S recession 10 years ago, Fed actions have been ahead of the curve, with this current round of interest-rate cuts commencing prior to the onset of the recession.

This has left some economic analysts convinced that a recovery is likely during the first or second quarter of 2002.

On the other hand, with short-term interest rates already at historic lows, any new bouts of weakening consumer or business confidence would likely have to be combated by fiscal, rather than monetary, policy-makers.

In fact, at the federal and state level, spending plans are being, or already have been, formulated to fight the recession.

At the state level, transportation projects, such as road construction, have been expedited.

Unfortunately, balanced-budget requirements dictate that declining tax receipts be offset with declining expenditures. As a result, other areas of the state budget, notably education, are facing substantial cuts.

In Washington, a breakdown in negotiations between the House and Senate most likely has ended for this year the possibility of President Bush signing into law an economic-stimulus package.

The issue is likely to be re-examined after the new year, with a focus on extending unemployment benefits, speeding up the phase-in of some of last year's marginal tax reductions and health insurance for the unemployed.

For Brevardians, the aftermath of the Sept. 11 attacks has yielded predictable results.

Worries about security and pocketbook uncertainty have led to a contraction in travel and its inevitable consequences for our leisure and tourism sectors, as well as for associated retail and dining establishments.

Microeconomic disruptions such as the closure of six miles of State Road A1A to provide greater security for Patrick Air Force Base, have disproportionately impacted some businesses.

After more than three months, the road is set to be reopened in early January.

Unfortunately, no immediate panacea exists to alleviate the problems that businesses face as a result of the attacks. That will take time and a restored sense of security.

In contrast, local manufacturing and technology companies incurred rather mild layoffs in late 2001, and may actually benefit from an increase in federal spending on defense, security and communications.

And one final perspective: A rising unemployment rate is a lagging indicator of recession, meaning joblessness continues to rise after the recession ends.

The last American recession occurred over an eight-month period from July 1990 to March 1991. In its aftermath, U.S. unemployment continued its ascent, finally peaking in June 1992 at 7.8 percent.

If history provides a guide, unemployment rates may not hit a new peak until late 2002 or early 2003.

Michael Slotkin, Ph.D., is an assistant professor of economics in the School of Management at Florida Tech. He teaches courses in microeconomics, macroeconomics, managerial economics, and environmental and resource economics.