Slow start, feeble recovery? Clues for '83 say otherwise
If an economic recovery starts slowly, will it remain a limpid recovery? Much is being made of the small increase recorded by the first-quarter growth in real gross national product (GNP) - the output of goods and services - in describing the subdued character of the economic recovery now widely believed to be under way in the United States. But the first-quarter rise of GNP in an economic recovery does not tell us what the first year of recovery may ultimately look like. Some recoveries start slowly and speed up, some start fast and slow down.
Only three times in the seven previous post-World War II economic recoveries in the US has the relative improvement in GNP in the first quarter of a recovery correctly revealed the relative improvement of GNP after a full year of recovery. On a fourth occasion, the first-quarter performance came fairly close to suggesting its full-year achievement. In the three remaining recoveries, GNP did not end up as its start might have suggested.
The fact is that GNP's performance after even two quarters of economic recovery is not much better as an indicator of its behavior over the first year of recovery as a whole than after one quarter.
Probably what is most remarkable about GNP is that its improvements after two quarters of economic recovery have been so similar, regardless of what its first-quarter performances have been.
With the exception of the recovery after the 1948-49 recession, one that involved a major buildup related to the Korean war, the two-quarter recovery improvements in the six remaining recoveries were all within a half-percent of one another from the strongest to the weakest.
From the earliest recovery (1954) to the latest recovery (1980), the two-quarter increases were 3.3 percent, 3.1 percent, 3.0 percent, 3.0 percent, 3 .5 percent, and 3.0 percent, respectively.
A funny thing about GNP is that for all its popular acceptance as the most all-encompassing economic statistic, it sometimes behaves most peculiarly.
For example, in this last recession, the longest of all the post-World War II downturns and one that lasted for 17 months, GNP only fell for two quarters (six months).
It reached a low as early as first-quarter 1982, but fell no further. (See chart.) Actually, it improved slightly during the rest of 1982.
Meanwhile, important areas of the economy were falling apart between first-quarter 1982 and the end of the year. The unemployment rate rose from 8.8 percent to 10.7 percent. The number of unemployed rose from 9.7 million to 11.9 million. The Federal Reserve Board index of industrial production fell from 143 to 135.
As you know, economists have been thoroughly castigated for their belief that the recession would end early in 1982 and proceed to recover moderately thereafter. On the basis of GNP, at least, they were half right. The GNP recession did end early in 1982. Its subsequent recovery left much to be desired , but it did not participate in the further recession reflected in other measures of the economy.
Having said all this, we should point out that the whole story of first-quarter 1983 GNP has yet to be told.
All we have so far is a preliminary GNP first-quarter estimate based on partial data. There will be revised GNP data in both of the next two months. It would only take a revision of a few tenths of a percent to make the first-quarter 1983 increase equal to the increases experienced in four of the seven previous economic recoveries.
What may be more important to the subsequent strength of this recovery is not what is happening in GNP, but what is happening in such economic indicators as the prime interest rate, unit labor costs, commercial and industrial loans, and the ratio of installment credit to personal income.
It was the behavior of these indicators in the early months of the previous economic recovery that led to that recovery's weakness and short-lived existence.
The immediate upsurge in the prime rate and in commercial and industrial loans, the absence of any significant correction in unit labor costs, the failure of the ratio of installment credit/personal income to rise - all these phenomena helped to choke off recovery.
The behavior of these economic measures this time is much more conducive to a sustained recovery.
So don't give up on GNP just yet. Its first-quarter performance need not be taken too seriously. A year from now, we may look back and be pleasantly surprised.