Tax-cut opponents may call the economic slide of 2001 “the Bush recession,” but the Federal Reserve was worried about recessionary indicators as far back as 1998, more than two years before President George W. Bush took office.
According to 1,065 pages of Federal Open Market Committee transcripts released in late April (after a five-year embargo), Fed chairman Alan Greenspan worried privately about deteriorating economic conditions well prior to Bush’s election or candidacy, with FOMC members repeatedly expressing concerns about the manufacturing sector.
“The economy has been holding up,” Greenspan said in a Sept. 21, 1998, teleconference, “but it is now showing clear signs of deterioration, including anecdotal indications of some softening that we are now picking up at an increasing pace.” This September meeting was called to discuss the first of three consecutive monthly reductions in the federal funds interest rate. The last time the Fed took such action was in late 1991, the year the last recession ended.
The transcripts supplement economic data that show serious problems in the private manufacturing sector well in advance of the recession, which lasted from March to November 2001.
Manufacturing employment, an important indicator, peaked in March 1998. Fed bank presidents representing districts in industrial states (Michigan, Ohio, Wisconsin, and Pennsylvania) are quoted in the 1998 transcripts discussing manufacturing problems in those regions.
At the Aug. 18, 1998, FOMC meeting, Chicago’s Michael Moskow referred to “weakness” in durable-goods manufacturing employment. Anecdotal evidence of such weakness was discussed at two FOMC meetings the following month.
“While the economy is operating at a relatively high level,” said Philadelphia’s Ed Boehne on Sept. 21, “I have sensed a notable change of sentiment in recent weeks. It had been largely in the manufacturing area, but it now appears to have spilled out into broader sectors of the economy.”
On Sept. 29, Fed economist David Stockton noted “pronounced weakness” in factory employment, explaining that reports “seem to be pointing to a continued sluggish manufacturing performance.”
Cleveland’s Jerry Jordan observed:
We had a joint meeting in September of our three boards of directors. What was notable about the meeting was that about half of the group said that there had been a change in confidence and the other half said there was none. At earlier meetings, virtually no one had said that there was a concern on the downside.
At the same meeting, Chicago’s Moskow said:
I think it is fair to say that many of my contacts are much more nervous about the future than they were in August. For example, in the manufacturing sector we increasingly hear reports of weakness even among firms with little direct international exposure.
Manufacturing’s problems were also discussed during an Oct. 15 FOMC teleconference, and at regular meetings on Nov. 17 and Dec. 22, 1998. “Looking ahead,” said Fed economist Mike Prell on Oct. 15, “we have heard negative reports about the manufacturing sector that suggest that there is some greater weakness than we might have anticipated.”
That suspicion was confirmed in November 1998 when the steel industry was discussed. “In the steel industry,” said Moskow, “the production decline from a year ago is now greater in our district than for the nation as a whole.” Cleveland’s Jordan added, “If anything, we are going to see more plant closings and more layoffs in businesses related to metals.” (Industrial production of iron and steel products peaked in 1998.)
At the same meeting, New York’s William McDonough said, “The manufacturing sector in northern New Jersey and western New York is participating in the general slowing of manufacturing nationally and the growth in the services sector is not sufficient to make up for it.”
Three days before Christmas in 1998, Mike Prell cited “low capacity utilization and profit compression in many segments of manufacturing” in his report to the FOMC. The Fed economist referred to “the incoherence of the current picture in the industrial sector, outside of motor vehicles.” Filling out this darkening economic picture, Richmond’s J. Alfred Broaddus Jr. described falling employment levels in nondurable goods manufacturing sectors; Philadelphia’s Boehne observed “weakness in manufacturing persists;” and Cleveland’s Jordan reported that “directors and others we talk to focus attention on steel and how hard times have been for the steel sector.”
The newly released transcripts show clearly that the manufacturing sector’s problems did not start in 2001, and that they were very evident to the Fed in 1998. They also show clearly that the Fed chairman was worried about the economy.
On Oct. 15, 1998, while Alan Greenspan did not forecast a recession, he did acknowledge:
At this stage, after 50 years of looking at the economy on almost a daily basis, I must say that I have never seen anything like the current situation. Certainly, based on all the historic annals I have read, and I have done a good deal of reading in economic history, it would be an extremely rare event for this type of financial environment to emerge and eventually to recede without having any impact on the economy. Indeed, I do not remember any occasion when that occurred in the past.
Recessions are not partisan events. They occur under both Democratic and Republican presidents, and they are addressed with adjustments to fiscal and monetary policy. The Bush tax cuts were the proper response to an economy already showing signs of weakness in 1998.
– Greg Kaza is executive director of the Arkansas Policy Foundation, a non-profit economic research organization founded in 1995 and based in Little Rock.