Well, it sure didn't feel mild.

The latest word from those watching the economy is that, historically speaking, we're emerging from a rather mild recession. According to William Hunter, senior vice president and director of research at the Federal Reserve Bank of Chicago, the U.S. lost less than 2 percent of its Gross Domestic Product (GDP) from peak to trough of this particular recession. (1) What's more telling is that American durable sales, such as housing and autos, never lost ground, due mostly to aggressive interest rates spear-headed by the Fed. The stock market is wishy-washy, but coming back, and housing equity values have been phenomenal, raved Hunter, which has prompted consumers to borrow against the equity in their homes. So, score one for the economy, zero for consumer debt ratios.

At the May IPC Technology Market Research Council (TMRC) meeting in Chicago, Hunter gave a fairly upbeat macro-view of the economy and offered some insight as to where we're headed. According to Hunter, this recession was unique in that only two of the four sectors the Fed watches signaled that it was a recession: nonfarm payroll employment and industrial production. The two other sectors, manufacturing/trade sales and personal income less transfer payments, didn't show much of a sustained downward trend.

Cold comfort to those of us in the industrial production market. According to Hunter, 1.7 million jobs were lost in this "mild" recession, with 88.7 percent eliminated in manufacturing alone. Layoffs, plant closures and restructurings we know all too well, fueled by the negative industrial production we've experienced for the past year and a half. However, on a positive note, Hunter indicated that the industrial production sector gained 1.6 percent of its lost value from December 2001 to March 2002. This gain indicates that manufacturing may be recovering--or, as Hunter put it, "bumping along."

More upbeat signs Hunter sees that may indicate an expansion in manufacturing are workweeks going up, companies hiring temporary employees once again and orders picking up a bit. "The outlook is pretty positive, especially when you look at productivity numbers," confirmed Hunter. The U.S. experienced an exceptional 8.6 percent productivity increase in first quarter 2002 due to companies' cost-cutting measures. Increased productivity generally leads to increased profits, which, if the new-found wealth is spread to workers, leads to increased consumer spending. Sound good?

Not so fast. The catch is that real consumer spending didn't really tank over the past few quarters. So we can't expect much of a boost to the economy from the modest pickup in projected consumer spending.

Instead, the real uncertainty is business capital spending, which completely collapsed in the summer of 2001 and hasn't gained much ground since. Overall, the U.S. has experienced a 50 to 70 percent decline in capital spending during this recession, according to Hunter. What's worse news is that capital spending is a major key to pulling us out of this recession, but most companies Hunter surveyed said they're not taking on any new investments until the economy picks up. Talk about your vicious cycles.

How do we stand currently? With the recent pickups in the semiconductor, router and server markets, unemployment expected to peak right about now and fairly benign inflation potential, Hunter felt comfortable with predicting a U.S. upturn, modest though it may be by historical standards. Barring, of course--that favorite disclaimer of financial analysts--any further shocks like terrorist attacks. Which is exactly the slippery slope that can't be predicted.

Reference

(1.) Hunter, William C. 2002. Economic overview. IPC TMRC. May.

Lisa Hamburg, Editor-in-Chief

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