Ten years into the longest expansion in US history, the boom economy of the 1990s has finally fallen off its marble pedestal, posting negative growth for the first time.
The decline in the real gross domestic product number for the third quarter, released yesterday, doesn't necessarily presage all gloom.
The 0.4 percent contraction in the economy, on an annualized rate, was far less than economists were expecting, suggesting that the recession most everyone agrees the US is now in may be relatively short-lived.
Nevertheless, the negative growth number, coupled with weakening consumer confidence, shows how tenuous the economy remains in the wake of the Sept. 11 terrorist attacks. The White House used the latest news to heighten pressure on Congress to pass a stimulus package, now stalled over disagreements on the right balance between tax cuts and spending.
"My call to Congress is, 'get to work,' " President Bush said yesterday, giving lawmakers a deadline of the "end of November."
Economic gloom has been deepening in recent weeks. Behind it: A steady flow of declining statistical reports and concern over possible longer-term obstacles to a return to prosperity. A widely watched index of consumer confidence, for instance, dropped sharply in October, the fourth monthly decline in a row.
New jobless numbers, due out Friday, are expected to be up as well. Economists also now assume that the GDP numbers for the current quarter will fall at a faster rate than those released yesterday. "The economic outlook is becoming increasingly pessimistic," says Lynn Franco of the Conference Board, a New York business-research group.
All this is one reason the GDP numbers this week heartened economists. The decline was less than half what many had predicted. Stock prices, as a result, rose in early trading Wednesday after two days of decline.
"Consumers held up their end," says Cynthia Latta, chief economist of DRI-WEFA, a Lexington, Mass., consulting firm. So did the federal government, which stepped up spending at a 4.6 percent annual rate. But business investment was negative.
A majority of economists expect the economy to turn around early in the new year. The consensus of several dozen polled earlier this month by Blue Chip Economic Indicators is that GDP will grow at a 1.4 percent annual rate in the first quarter of 2002, at a 2.9 percent rate in the second quarter, and faster later.
But a minority of economists maintains the upturn won't come until next summer at best. That would mean a slump lasting at least a year.
It is typical of recessions that rising unemployment, falling profits, more bankruptcies, and other bad news dampen the spirits of both economists and the public. Whether the grimmer views are justified remains to be seen. "Each business cycle is unique," notes Paul Kasriel, monetary economist for Northern Trust Co. in Chicago.
One oddity at this time is auto sales. Pumped up by zero-interest financing deals, they may have racked up one of the best months in history in October.
In general, economists are counting on the economy to finally get a kick from the Federal Reserve's looser monetary policy that began early his year, and from the stimulus package now wending through Congress.
But even the optimists see head winds beating on a recovery:
The war against terrorism and anthrax fears could prompt uneasy consumers to start really saving. Americans, as individuals, have been saving little in the past few years. If they don't spend as much in the months ahead, an upturn could be delayed.
Debt levels of both consumers and business are extremely high by historic standards. Economist Lacy Hunt speaks of "an inability of monetary policy to work well when you have excessive levels of debt in all sectors of the economy."
With the decline in stock prices, American shareholders have seen their portfolios decline by roughly $5 trillion. Baby boomers, nearing retirement, may make greater effort to offset stock losses by saving for more conservative investments.
The Fed has lowered interest rates nine times since the start of the year, to 40-year lows. Fed policymakers are expected to drop rates again at a meeting next Tuesday, by either a 0.25 or 0.5 percentage point.
The Fed's action has resulted in more rapid growth in the nation's money supply, the fuel for economic activity. The latest 12-month numbers show skyrocketing growth of 10.5 percent.
That means the Fed is covering the stimulus package of tax cuts and $49 billion of spending increases now before Congress with free, new money. In effect, it is "printing" that money.
To Mr. Kasriel, the combination of easy money and fiscal stimulus should revive the economy soon in the new year. But Mr. Hunt, who helps manage $4.3 billion in private investment in bonds for Hoisington Investment Management Co. in Texas, says the "gigantic debt overhang" will neutralize this stimulus.