After the gold rush

A year ago economists hadn't stamped an expiration date on the record-setting expansion of the 1990s. Most were forecasting a slowdown, not a downturn. But the economy - like a carton of milk long past its freshness date - went sour, regardless.

Ten years of happy statistics ended last March, says the "dating committee" of the National Bureau of Economic Research, the Cambridge, Mass., organization that dates the ups and downs of the business cycle.

The terrorist attack of Sept. 11 deepened growing consumer gloom. Nonetheless, most economists are still predicting that the recession will wind up being modest by postwar standards.

In some ways, it is an unusual recession. It is "the first recession of the Information Age, the first recession in the modern-day era of globalization, and America's first bubble-induced recession in 70 years," notes Stephen Roach, chief economist of Morgan Stanley, the New York investment-banking firm.

The bursting of the stock-market bubble meant $7 trillion or so of losses on paper. That has had something to do with the economy's decline.

Now the nation's economy is struggling to turn upward again. And economists, ever bold in their predictions, are seeing recovery in the first quarter of 2002 - or maybe the second quarter. At least by the third.

In its unsuccessful effort to dodge a recession, the Federal Reserve has stepped on the monetary gas 11 times since last January with rate cuts. The federal funds target rate, governing overnight loans between banks, now stands at 1.75 percent. It was 6.5 percent a year ago.

The total decline of 4.75 percentage points is the biggest since the 1957-58 recession. According to economists, it takes at least nine months for monetary easing to start pumping up an economy. So, in theory, the Fed's action should start reviving the economy soon.

Congress also got into the economic-rescue business with a tax cut signed into law in June, a $40 billion rebuilding package after the Sept. 11 attacks, and a $15 billion bailout for the airlines.

A further stimulus package was fought over in Congress last week.

It turns out that the good years of the 1990s were somewhat less "boomy" than thought. The "New Economy" was "mostly hype," argues Dean Baker, an economist with the Center for Economic and Policy Research.

The recovery, which started in March 1991, had a slow start. Taking that into account, the average annual growth rate of gross domestic product (GDP), the nation's output of goods and services, for the 10-year expansion was, in inflation-adjusted terms, 3.1 percent. That's slower than recoveries in the 1950s and 1960s, notes Mr. Baker. It was even slightly below the pace of the 70s.

A typical worker saw his or her real wages grow less than half a percentage point annually. Most of the income gains went to high-end workers as income inequality worsened - until the tight labor market of the last two or three years of the expansion.

At least most people had jobs. The unemployment rate sank to 3.9 percent in the fall of 2000. That was far below what many economists thought possible without kicking off a serious bout of inflation.

With the recession, the jobless rate has risen to 5.7 percent (in November). It's "likely" to touch 7 percent next year, figures Donald Straszheim, of Straszheim Global Advisors in Westwood, Calif. Some other more-bearish economists predict 8 percent. The corporate axe was swung again last week, with Motorola announcing a layoff of 9,400 more jobs and General Electric cutting 3,000 jobs.

During the 1990s, the after-tax profit share of corporate income reached a postwar high. That encouraged investors to bid up stock prices to record highs. At its peak in the first quarter of 2001, the ratio of all corporate equities to after-tax corporate profits exceeded 31 to 1.

Since then, corporate profits have plunged. The ratio of stock prices to earnings, now about 38 to 1, remains far above the historic average of 14.5, even with the recovery in stock prices since Sept. 11.

As Baker sees it, the stock market "bubble" created $9 trillion of "illusory wealth" that fostered a consumption boom and a savings dearth.

Capital gains on stock investments were also a factor in the federal-budget surplus - $127 billion in the fiscal year that ended Sept. 30.

That surplus is gone or nearly gone now, blown away by the tax cut, the slump, and extra spending.

Baker worries that the stock-market decline could shrink consumer spending by more than $400 billion. Consumers, bothered by Sept. 11 and the recession, will buy less, save more.

The latest sales numbers do indicate caution. Retailers claim sales in the first two weeks of December were sluggish, according to the Redbook Average, a survey of key retailers.

One positive factor in the '90s was the growth in productivity. It averaged almost 2.5 percent a year, nearly twice that in the 80s. But it was still below the 2.8-2.9 percent growth between 1948 and 1969, notes Baker.

At that time, workers got a bigger share of gains in productivity. Hourly compensation was rising 2.2 percent a year after inflation.

The extra productivity in the '90s helped keep inflation down. Consumer prices have risen 1.9 percent in the 12 months ended in November.