Could the US recession be revised away? When the US National Bureau of Economic Research's business cycle dating committee determined in November that the cycle had peaked in March 2001, it came as no surprise to many observers.
After all, industrial production, one of the four coincident indicators of economic activity tracked by the group, peaked in June 2000. The NASDAQ bubble had been leaking air since March 2000. Corporate profits witnessed the largest percentage decline in the post-World War II period. It took until March 2001 for employment, the broadest measure of the entire economy, to roll over, reflecting the gaping divide in the performance of the services and manufacturing economies.
By November, a recession was a given to most economists, an eventuality hastened by the Sept. 11 terrorist attacks that destroyed the World Trade Center's twin towers.
The strength of consumer spending following Sept. 11 seems to have foiled the realization of the layman's definition of recession: two negative quarters of growth in gross domestic product. With recent data suggesting fourth quarter real GDP growth rose more than the 0.2 percent increase initially reported, the third quarter decline of 1.3 percent may stand alone as the sole negative quarter, which would make the 2001 recession the shallowest of the post-World War II recessions. Some economists are questioning the outcome if it had not been for Sept. 11.
"Prior to 9-11, we believed the economy would narrowly avoid any contraction in real GDP," wrote economists at Credit Suisse First Boston in their Feb. 11 US Economics Digest. "In retrospect, it seems that without the temporary loss of demand and output in the immediate aftermath of the terrorist attacks, that's what would have happened."
Not according to Victor Zarnowitz, a member of the NBER's six-member dating committee who is recognized as one of the leading experts on the business cycle.
"There's not a good case for saying that without 9-11 there would have been no recession," Zarnowitz says. "We were already in recession; 9/11 made it worse."
Some of Zarnowitz's colleagues apparently were less convinced. In its Nov. 26 press release, the NBER said: "Before the attacks, it is possible that the decline in the economy would have been too mild to qualify as a recession. The attacks clearly deepened the contraction and may have been an important factor in turning the episode into a recession."
Early signals of recession, especially from leading economic indicators, were ignored, Zarnowitz says.
"The LEI peaked in January 2000, and declined persistently and pervasively," he says. "That was 14 months before the March peak. There is a great reluctance to be early forecasters of bad news."
One might say of good news, too. The LEI turned up in May and was sideswiped by Sept. 11 before proceeding to eclipse the previous (January 2000) high in December last year.
Even so, it wasn't until strong retail sales for January caught everyone off-guard that economists were willing to entertain the idea of respectable first-quarter growth of 3 percent or higher.
The January LEI will be released today, with the Bloomberg survey expecting an average increase of 0.5 percent following December's 1.2 percent increase.
"The LEI is clearly pointing to recovery," Zarnowitz says.
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