Economic rebound begins, ever so tepidly

US output rose 0.2 percent in the final three months of 2001, likely ending slump.

Goodbye recession. Hello recovery.

Yes, the economy looks like it's on a roll again. Maybe it's a slow roll, but it's a roll.

The government supported this view yesterday with its first look at the nation's fourth-quarter gross domestic product (GDP), which showed a positive growth of 0.2 percent. If this number is not revised downward by much, it will mean that the recession was one of the shallowest in modern times.

The fact that the economy finished the quarter in the black surprised most economists, who had expected the period to record a 1 percent drop after a decline of 1.3 percent in the prior quarter. But consumers, resilient as ever, reached deeper into their pockets than expected. In addition, government spending surged at a near double-digit pace - helped by a step-up in spending on the war and homeland defense.

Although economists expect consumer and government spending to slow in the current quarter, business should start to take up some of the slack by restocking its inventories.

"It will add as much as 5 percentage points [on an annual basis] to the current quarter," says Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis. "I am almost sure the recession has ended and the recovery has begun."

The prospect that the economy is moving forward also means that the Federal Reserve, after 11 rate cuts, will likely not pare interest rates any more in the months ahead. The Fed ended a two-day meeting yesterday after the Monitor went to press.

In the past few days, several economic statistics have been supporting the view that growth may be back on track. On Monday, the Conference Board reported that consumer confidence had improved once more. Then, on Tuesday, the government reported that durable goods showed a modest increase as firms started to replenish warehouses.

But tomorrow, the government will report the January unemployment rate, which is likely to show another uptick. "Jobs may be the ultimate determination of when this recession is officially over," says Mark Zandi of

High-profile bankruptcies

Indeed, the downturn continues to take its toll on corporate America. On Monday, Global Crossing, a once high-flying telecommunications company, declared bankruptcy. This follows the collapse of Enron, the Houston-based energy company.

According to the American Bankruptcy Institute, corporate failures rose 16.1 percent in the third quarter of 2001, compared with the third quarter of 2000.

A continued increase in bankruptcies may be foreshadowed by a decline in corporate credit ratings. According to Moody's Investors Service, there are now three credit downgrades for every upgrade - the worst corporate performance since 1991. "The culprit is aggressive business investment in the mid- to late-1990s, compounded by debt financing," says John Puchalla, an economist at Moody's.

The surge of business spending in the 1990s has led to overcapacity in sectors as diverse as chemicals, retailing, and auto parts, says Mr. Puchalla. "It implies capital spending will remain weak for the next few years, and this will tend to slow the pace of economic growth."

In fact, yesterday's GDP numbers showed a 12.8 percent drop in business spending on new plants and equipment. But at least some anecdotal evidence of new investment is mounting. Since October, the local economic development organization in Virginia's Roanoke Valley has seen an increase in inquiries to expand and relocate businesses. Among those looking to build: a biotech company and a German company that manufactures a product for the home-building industry.

"Today, we have more than $300 million in projects on the table," says Phillip Sparks, executive director of the Roanoke Valley Economic Development Partnership. Although the unemploy- ment rate there is a 2.5 percent, Mr. Sparks says the community plans to fight for the new projects, since it estimates it has 25,000 people who are "underemployed."

But problems nearby

Like many parts of the country, an area under stress is nearby. Martinsville, Va., which is an hour away, has an unemployment rate of 14 percent. This spring, VF Corp. will close its textile factory there, resulting in the loss of 2,300 jobs. Problems like those, in turn, have meant a hiring freeze for the community, no wage or salary increases last year, and no discretionary spending money for places like the library. "The recession and the national economy has made a bad situation worse," says Tom Harned, director of economic development.

But on the other side of the nation, in Irvine, Calif., business is starting to bustle. Biomedical and biotech companies are setting up shop, despite the fact the unemployment rate is a low 2.2 percent. "We're the busiest we've been in the past three years," says Paul Hiller of the Chamber of Commerce. "We expected it to slow down, but it didn't."

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