March 15, 2019
Austin Goolsbee warned readers in an NYT column that a recession can just sneak up on us with very little warning. Strangely, he picks the 2001 recession as his example.
The 2001 recession seems a bad example since it had a pretty clear cause, the collapse of the 1990s stock bubble. The tech-heavy NASDAQ had declined by more than 40 percent by the start of the recession in March of 2001 from its bubble peak in 2000 and the S&P 500 had fallen by almost 20 percent. Both were also on a clear downward path with the NASDAQ eventually bottoming out at a bit more than one-quarter of its bubble peak and the S&P 500 at a bit more than half.
The bubble was also clearly driving the economy. This was one of the few periods in history when companies were directly financing investment with sales of stock. This made sense at the time since startups with no profits could raise hundreds of millions with initial public offerings. That opportunity disappeared when the bubble burst. As a result, investment plummeted from 14.6 percent of GDP in the fourth quarter of 2000 to 13.2 percent of GDP in the fourth quarter of 2001, eventually bottoming out at 11.9 percent in the first quarter of 2003.
The bubble was also driving consumption, as the wealth effect associated with the run-up in the stock market pushed savings rates to then-record lows. The savings rate had fallen from over 9.0 percent at the start of the 1990s to a low of 4.5 percent of disposable income in the fourth quarter of 2000. It rose in 2001 following the collapse of the bubble, hitting 6.5 percent in the third quarter of 2001 and then settling in at an average of 6.0 percent in 2002.
Together, the drop in investment and consumption implied a loss in annual demand of more than 2.5 percentage points of GDP, which would be equivalent to $500 billion in today’s economy. It should not have been surprising that these totally predictable effects of the bursting of the stock bubble would have led to a recession. (While the 2001 recession is conventionally considered to have been short and mild, it led to the longest period without net job growth since the Great Depression. The Great Recession led to an even longer period without net job growth.)
On the other hand, there may be some case for a recession sneaking up on the economy now. Retail sales fell sharply in December, and a modest increase in January still left sales below November levels. Manufacturing production has been trending downward since September. New orders for capital goods (excluding aircraft) in January were also below their November level and are only 3.1 percent above their year-ago level. Private construction spending has been trending downward since October.
All of these are disturbing signs in an economy with strong employment growth and respectable wage growth. If this adds up to a recession, it would probably be fair to say that it has snuck up on us, since it is difficult to identify any plausible cause. The Fed’s interest rate hikes have surely had an impact in slowing the economy, but it is difficult to believe that this impact could be large enough to cause a recession.
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