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Bye-Bye Baby Recession
Overall, this looks to be the shortest and mildest downturn on record.


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Larry Kudlow

A spate of new economic data that has economic recovery written all over it could well remove a key election-year issue from Democrats running for the Senate and House in November.

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Rumor has it that when the judges at the National Bureau of Economic Research decided last fall that the U.S.’s tenth recession in the past fifty years started in March 2001, they used Arthur Andersen to audit the books. Just kidding, of course, although some Bush administration officials are now questioning whether the recession happened at all.

More and more, today’s recovery cycle looks to be V-shaped — quick down and quick up — with a sizable stock-market bounce yet to come. And if a V-shaped recovery turns out to be the case, then even small budget deficits could turn into surpluses, removing yet another issue from the Democrats’ rather thin arsenal of election-year weapons.

Overall, this looks to be the shortest and mildest recession on record. In fact, while private-sector gross domestic product — which does not include government spending — has declined in each of the past three quarters, real GDP actually increased 1.2% in calendar year 2001. The largest chunk of the economy, consumer spending, never dipped at all. And though it could still rise a bit in the months ahead, the current 5.6% unemployment rate is certainly the lowest jobless pace in any modern recession.

Of course, key aspects of the economy were not as fortunate through this recession. Stock-market investors woefully experienced a two-year decline that saw over $5 trillion of wealth go down the drain. In terms of capital-spending investment, business declined 7.5% over the past eighteen months. Industrial production fell 7%, and 1.4 million jobs have been lost.

But the recession call, it seems, was only correct by a cat’s whisker. And through it all, the resiliency and durability of our technology-led free-market economy has been on full display. Be certain, there’s a lot to cheer about these days.

Over the past two decades, most economic sectors have been de-regulated. Tax-rates on balance have come down significantly and inflation has been vanquished. Interest rates are at 40-year lows. And with only a few exceptions, U.S. trade has been liberated, spawning intense business competition that has made the vast majority of U.S. industries more efficient and productive.

So, for those pessimists who say that the two-year stock-market decline signals the end of U.S. prosperity, it’s time to think again. Since the end of inflationary recession — or stagflation — in 1982, the U.S. economic machine has created over 40 million new jobs and nearly $30 trillion of household wealth. More, out of a total 76 quarters in the past nineteen years, only 5 quarters (or 6.6%) have registered declines. That means the economy has been growing 93% of the time. Even at the bottom of this recession, 94% of the workforce was employed.

Here’s another eye-opening point. In late 1998, hi-tech business-capital spending (such as on information-processing equipment and software) exceeded investment in industrial, or old economy, capital expenditures for the first time. Through last year’s fourth quarter, despite the nasty drop in tech and dot-com stocks, new-economy capital spending still beat old-economy investment by $130 billion.

For those analysts who blame the recession on the so-called dot-com bubble — or over-investment on Internet companies — it’s worth noting that capital expenditures in both the new and old economies fell by roughly the same 11% this recession. At the peak of the last recovery cycle technology spending contributed about one-third to economic growth. Look for it to contribute as much or more in the new recovery.

Now, if you really want to know the biggest reason for the stock-market-led business recession that came to an end last October, look no farther than the Federal Reserve. The central bank’s excessively tight policy in 2000 launched a brief deflationary recession the following year. Fortunately, the Fed has since loosened up, replenishing the liquidity base of the economy and putting us back into growth mode.

Since taking the reigns last year, the Bush administration has pursued a free-market agenda of lower tax rates and reduced regulatory burdens for retirement, health care, energy, anti-trust, and telecommunications. And while steel-industry protection remains a bad idea, the administration’s additional trade-opening measures will also promote growth. Domestic prices are stable and the dollar is sound.

Once again, economic freedom has proven the gloomy naysayers completely wrong. Get set America. We’re headed for a third-consecutive decade of prosperity.



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