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US may not rebound with a boom

In decades past, the next step for an American economy in recession would be clear. It would boom.

People would start spending again, and companies would quickly increase production, creating hundreds of thousands of jobs and fattening paychecks. In a quickly widening spiral, these developments would lead to even more spending.

But the rules for recoveries may well be different today -- not because of Sept. 11, but because of fundamental changes in the economy. Even after a year-end flurry of good news on home sales, consumer confidence and jobless claims, the recovery likely to start next year could be far weaker than those in other years that have followed downturns. A limited rebound would have a broad impact on the way people live and businesses function, whether because unemployment stays high, corporate earnings continue to be sluggish or the stock market is slow to rebound. It could also shape much of the political debate leading into the midterm Congressional elections.

The most basic change is that recessions are less common today than they were in the 1950s, 1960s and 1970s. The service sector, which is less prone to volatile swings than the manufacturing sector, has grown rapidly, and the Federal Reserve appears more adept at managing the economy.

But when downturns are infrequent -- roughly once a decade, rather than twice -- the often-overlooked price is that the ensuing recoveries are neither sharp nor simple. "Because we get smaller downs," said Van Jolissaint, the corporate economist at DaimlerChrysler, "we also get smaller ups."

The last three decades have included the long downturn of the mid-1970s, the double-dip recession of the early 1980s and the short recession and weak recovery of the early 1990s. Only severe downturns, like the second one in the early 1980s, have produced rebounds as robust as those of earlier decades.

Not since 1970 has a strong recovery followed a brief recession -- and it is just such a sequence that would be necessary for the coming year to be a prosperous one.

Since 1980, the nation's number of jobs rose just 3 percent, on average, in the two years after a recession. From the 1950s through the 1970s, the average increase was 7 percent.

Even Wall Street forecasters, who regularly err on the side of optimism, do not expect the coming year to resemble the recoveries of decades past. Most predict that the economy will accelerate only gradually.

Its best performance will be in the year's final quarter, when it will grow 3.9 percent, at an inflation-adjusted annual rate, according to an average of dozens of forecasts compiled by Blue Chip Economic Indicators, a newsletter.

In past decades, although the economy did not seem as strong as it is today, growth often reached 8 percent and higher in the wake of even mild recessions.

The two different messages coming from the Fed recently highlight the contrast. Alan Greenspan, the Fed chairman, has continued to trumpet corporate America's adoption of new technologies, which he says have increased productivity and will lift the long-term growth rate. Other Fed officials share that opinion, but many have also said recently that they expect the recovery to be slow.

Reference point

Indeed, the slow recovery of the early 1990s, rather than seeming to be an aberration, has become the reference point for the argument now confronting economists.

You cannot store a haircut. That fact goes a long way toward explaining why the nature of the business cycle appears to have changed.

When an economy slows, and households and companies start to reduce their spending, they often cut back most on manufactured goods. A family gets by with a creaky washing machine for a year more than it had planned. A business, expecting future sales to be slow, uses up the goods sitting in its warehouse.

Many services are harder to do without. Consumers cannot keep extra plumbers' visits on hand or postpone spending on child care. College tuition, doctor bills and car repairs cannot be put off.

On the other hand, when good times seem to return, people do not get a few haircuts at a time. They might buy a new television, however, or, if they run a company, decide to build a factory.

The implications for the broad economy are obvious: The service sector does not shrink, or grow, as fast as the manufacturing sector. And the service sector now accounts for about 80 percent of all jobs in the US, up from 60 percent in 1960, as a result of the country's higher wealth and of the move of manufacturing jobs to other countries.

The manufacturers that have remained in the US, and the retailers selling their and others' products, have also been able to decrease the size of their own stockpiles. Many -- most famously Wal-Mart -- have used enormous computer databases to match inventory and sales levels more accurately.

The technology industry itself plays a role. Its products last a shorter time than, say, a car, and its factories need less time to build up or wind down.

"It's just a much shorter production cycle," said Robert Gordon, an economist at Northwestern University. "We will get an inventory bounce-back in 2002, but technology has less of an inventory cycle."

Even during the most optimistic days of the late 1990s, overall inventory levels remained about 10 percent lower than they did during the 1980s, relative to sales, according to Economy.com, a consulting firm in West Chester, Pennsylvania.

"By tying everyone together, technology has given everyone the same information at the same time," said William Stavropoulos, the chairman of Dow Chemical. "You're not always looking back, saying, 'I wish I did this.'"
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