Economic Stagnation Drags On and On

TO University of Dallas economist Michael Cosgrove, the "natural state" of the United States economy is growth. That's because "people want to do better, companies want to do better." They push for growth.

But for at least two years, the US economy has been in stagnation or worse.

Stephen McNees, a Federal Reserve Bank of Boston economist, figures substandard growth started 17 months ahead of the official July 1990 start of the latest recession. (The National Bureau of Economic Research, the arbiter of the business cycle, has not yet declared an end to this recession. But many economists hold that a slow recovery began in the spring of 1991.)

"Real growth in the year prior to any postwar recession has never been lower than the 1.3 percent prior to the 1990-91 recession," notes Mr. McNees in his bank's latest New England Economic Review.

And even though that recession may well have ended last May or June (according to Mr. Cosgrove - possibly April according to McNees), sluggish growth continues. Cosgrove figures real growth in output will be no more than 1 percent in the 12 months to May-June of this year. That compares to nearly 5 percent growth on average in the first year of previous recoveries.

It is the length of this slump that has made this recession extremely troublesome for so many people.

Cosgrove blames the slack to some degree on the excesses of the 1980s, particularly the buildup in corporate debt with leveraged buyouts and other mergers and acquisitions and similar debt mountains for the federal government and individuals.

"Downturns have a purpose," he argues. "They help cleanse the economy of excess.... It will take the remainder of this decade to get back to a 'normal' balance sheet for the economy. But excessive debt is now probably at about the level where easy money can start the economy growing."

McNees, a close student of the business cycle, describes the 1990-91 recession (assuming it ended in the spring of 1991) as "clearly one of the mildest, though probably not the mildest in the postwar era." The decline in real output (minus 1.3 percent in gross national product) was about half as large as the average declines in prior postwar recessions. The rise in the unemployment rate (1.9 percent) was smaller than in the eight prior recessions. This was due to slower growth in the working-age populati on and a decline in the participation of working-age people in the labor force. However, the unemployment rate reached a higher maximum level (7.1 percent) than in the 1953 and 1969-70 recessions. The length of the recession (nine months) was less than the average 11 months.

"This relative mildness," writes McNees, "seems to run counter to fears that have been raised about the fragility of the financial system, the massive debt overhang, the wave of restructuring, and the record collapse in consumer confidence. These issues may yet emerge...."

A long slump is not unique in the US economy, says Cosgrove. Between the fourth quarter of 1973 and the fourth quarter of 1975, national output grew from an annual rate of $3,289.7 billion (in constant 1987 dollars) to a rate of $3,292.5 billion - practically no change. Between the last quarter of 1978 to the first quarter of 1983, gross domestic product (GDP) rose minutely, from a $3,779.6 billion annual rate to a $3,783.5 billion rate - a four-year period.

In the current slump, GDP has moved from a $4,845.6 billion annual rate in the third quarter of 1989 to a $4,866.3 billion rate in the fourth quarter of last year. Cosgrove expects only a 1 percent growth rate in the current quarter of 1992, extending the period of "growth recession."

During the last no-growth period, voters ran President Carter out of the White House. But Cosgrove does not expect President Bush to suffer the same fate. "President Carter was perceived as a well-intentioned fellow but weak in all facets of leadership," he recalls. "In comparison, President Bush is also perceived as a well-intentioned person who is a strong leader on the international side. He is perceived as inept on domestic economic issues, but at least he has the foreign strength going for him."