March 27, 2002

The End of the 2001 Recession

Recent statistical releases on production and prices have carried two messages of note. The first was that the producer price core inflation index (that is, excluding volatile food and energy prices) was completely flat last month: zero change. There is no inflation. Over the past year, in fact, the producer price index has fallen by 2.6%. The fact that inflation is totally dead and buried even though the unemployment rate is no higher than five and a half percent is totally remarkable. Virtually no one as recently as 1995 would have believed that such a configuration of statistics was at all possible.


The Federal Reserve can thus concentrate on trying to maintain full employment, without worrying about controlling inflation at all. In fact, the balance of short-run risks is that the U.S. is more likely to fall into deflation (a more dire economic disease) than to see a return of inflation.

The second is that growth in industrial production has resumed. A month ago we thought that seasonally-adjusted industrial produciton was 0.1% lower in January than in December. Now we think that seasonally-adjusted industrial production was 0.6% higher in February than in December. The depth of the recession in manufacturing remains very large, however: capacity utilization (at 74.8%) is still lower than it has been since the very start of the 1980s. But back then unemployment was 10%, not its current 5.5%.

How fast will America's economic recovery in 2002 be? It is anyone's guess. The long-run effects of the terror attack on the World Trade Center on 911 on economic confidence are still unknown. The prospect of additional devastating terrorist atrocities remains. On the other hand, the enormous degree of monetary stimulus set in motion by the Federal Reserve over the past year has still not had nearly its full effect on spending: it is going to give the economy a mighty forward shove over the next nine months. And there is substantial fiscal stimulus as well produced by the huge swing in the federal budget. How will these forces resolve? The Economist's poll of forecasters finds a low estimate of a U.S. growth rate in real GDP per capital of 0.7% per year over the next two years, and a high estimate of 2.5% per year over the next two years.


Posted by DeLong at March 27, 2002 10:08 AM | TrackBack

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