i. unemployment fell a little in January
ii. real GDP grew a little in the last quarter of 2001.
iii. some of the “consumer expectations” data is optimistic.
iv. the Fed, which has more data than anyone, has stopped seeing any need to cut interest rates.
v. it looks as if the rate cuts during 2001 have kept the stock market from falling any further and have boosted the value of housing, so that the “wealth effect” has kept the recession of 2001 from being deeper.
i. most forecasters see the economy recovering so slowly that unemployment will continue to rise for a year or more, perhaps rising to 7 percent. Businesses are dealing with their profit problems by laying off a lot of people, cutting salaries & wages, etc. Whether it’s a V-shape or a U-shape depends on who you are.
ii. businesses don’t seem ready to invest in new factories, etc. again yet.
iii. the world economy – the source of demand for U.S. exports – isn’t prospering.
it’s quite likely that consumers will start cutting back on their accumulation of debt, especially given (1) rising unemployment and (2) rising bankruptcy rates. This means a cut-back in spending, pushing the U.S. economy toward further falls in GDP.
this is likely to cause businesses to continue to cut spending on new investment, encouraging further declines. There’s an excellent story on this in today’s L.A. Times (2/5/02, front page). The problem is that interest on this debt has to be paid to avoid bankruptcy. [the two charts above were produced by Wynne Godley and Alex Izurieta, “The Developing U.S. Recession and Guidelines for Policy” available at http://www.levy.org. A lot of my analysis also follows their lead.]
this means that the U.S. is increasingly in debt to the rest of the world, so that an increasing amount of any domestic production must go to U.S. creditors in other countries. This also encourages a steep fall in the value of the dollar in foreign exchange markets. That would encourage are re-appearance of inflation, likely resulting in Federal Reserve efforts to fight inflation via higher unemployment. [The chart was made using Federal Reserves Flow-of-Funds data and the National Income and Product Accounts, available from economy.com’s data page, http://www.economy.com/freelunch/.]
James G. Devine
Professor of Economics
University Hall (Rm. 4227)
Loyola Marymount University
One LMU Drive, Suite 4200
Los Angeles, CA 90045-2659 USA
office phone: 310/338-2948; FAX: 310/338-1950