Detecting the damage of receding economic flood waters
Inundated by double-digit inflation and double-digit interest rates for some months now, the US economy should find itself on firmer ground before too much longer. Underlying the small first-quarter gain in the real (or deflated) gross national product, US economic activity was beginning to recede.
Just as the receding flood waters uncover the underlying damage that has been done, the receding economic activity will uncover new problems that will need to be corrected to achieve the firmer ground we mentioned. There will be problems of unemployment, reduced income, and less production to go around. But for all the difficulties, these are preferable to flood waters rising higher and higher, causing more and more damage, further undermining the foundations of the economy , and making rehabilitation a far greater undertaking.
Thus, while it may seem only a matter of words, we find it better to think of what is occurring as a receding of intolerable conditions rather than as a recession. Receding can be seen as a mixture of good and bad. Recession is generally viewed as something entirely bad; or, at least, overwhelmingly bad.
That the first-quarter rise in real GNP covered up an economy which was already receding in the first quarter is made fairly clear in monthly economic data.
Nonagricultural employment fell in March and April. The Federal Reserve Bank's index of industrial production fell in February and March. Retail sales also fell in February and March.
All three of these measures are designated as "coincident" indicators. Coincident indicators are those economic measures that "coincide" with the movement of the economy as a whole.
Such measures as the unemployment rate and housing starts tend to worsen some months before the economy as a whole, and weakness in such indicators does not confirm the beginning of a general receding, they anticipate the receding.
As for quarterly GNP, a quarterly economic measure does not reveal what has happened from month to month during the quarter.
For example, fourth-quarter real GNP was at an annual rate of $1,440 billion; first quarter real GNP was at an annual rate of $1,444 billion.
The annual rates in billions of 1972 dollars on a monthly basis could well have been something like the following:
1979 1980 Oct. Nov. Dec. Jan. Feb. Mar. 1,436 1,440 1,444 1,448 1,444 1,440
First-quarter 1980 averages out at an annual rate of $1,444 billion, compared with $1,440 billion for fourth-quarter 1979; but it is clear that GNP began receding after an annual rate high of $1,448 billion was reached in January. The first-quarter 1980 increase over the fourth-quarter 1979 level does not mean that GNP rose during the first-quarter 1980 months of January, February, and March.
Looking at what is happening as a receding rather than as a recession gives us a more tempered perspective.
The first few months of receding from a high still leaves economic activity at a reasonably good level.
The $1,440 billion for March 1980 in our example represents the impact of receding activity for two months, but it is still as good a level as that of last November, which was not considered as a "recession" level at all. On the contrary, at that time, which was only a few months ago, the $1,440 billion was considered a pretty good level.
It would be better not to use the term recession until economic activity has receded all the way to levels that fall below an underlying growth trend.What happens until that time is much more aptly described as a period of receding activity.
It is very doubtful that the economic lows we may see in the months ahead will be as low as those at the bottom of the 1974-1975 recession. Usually, when economic activity recedes, it begins to recover before it reaches the lows of the preceding recession.
This has been true of inflation and interest rates as well. Let's look at successive highs and lows in these two economic measures. The "rate of inflation" is an annualized 6-month rate; the interest rate is that for short-term bank loans.
Rate of Inflation (Percent) Apr. Jan. Jan. Jan. Oct. Jul. Mar. Jan. 1964 1966 1967 1970 1971 1974 1976 1980 High 4.0 6.7 12.4 16.5 Low 0.5 1.3 2.8 3.6
When the rate of inflation was at an annual rate of 12.4 percent in July 1974 , it would have been unthinkable to suggest we would see an annual rate as low as 3.6 percent ever again. But that's just what happened. When contemplating the receding of inflation that may lie ahead, 5 percent or 6 percent, somehow, seems more attainable in the light of what's happened in the past.
Interest Rate for Short-Term Loans Mar. Nov. aug. Feb. Feb. Aug. Feb. Apr. 1965 1966 1967 1970 1972 1974 1977 1980 High 6.15 8.64 12.40 * 20.00 Low 4.84 5.80 5.52 6.84
As with inflation, it is interesting to see that the lows go up much more slowly over the years than the highs. How many of us believed the interest rate would ever be below 7 percent again when it was a then-horrendous 12.4 percent in August 1974?
So much for things we want to see lower. But what about things we do not want to see lower? What about real GNP, for example?
The low in real GNP in 1975 far exceeded the previous high in 1969. Similarly, we can expect the next low in real GNP to exceed the previous high in 1973.
The same thing is true of employment. The number of employed may recede in the months ahead, but the lowest level should still remain far above the 1974 high.
The unemployment rate is another story. Since 1970 there has been a reversal of the long-term improvement that had occurred from 1957 through 1970. The 1975 high was far above the 1971 high; the 1973 low was much higher than the 1969 low. Similarly, the 1979 low is much higher than the 1973 low. Our feeling, however, is that the 1975 high will not be reached this time.
Hopefully, the receding of the economic flood waters will enable the nation to put its house in better order and to be better prepared to fight the possibility of any future flood threat.