This week’s release of the gross domestic product figures for the fourth quarter showed the economy growing at an anemic 1.4 percent, the lowest growth rate in five years. The stats confirmed what Alan Greenspan told Congress just a week earlier: that the economy has undergone a dramatic slowdown in the last four months, and may be idling at close to zero growth.
We’re not there yet. The classic definition of a recession is six months of economic contraction, which means that 1.4 percent number would have to dip into negative territory before the R word applies. “We limit the concept of a ‘recession’ to something where there’s been an actual decline, a substantial decline, not just a borderline one,” says Robert Hall, the Stanford economist who heads the committee at the National Bureau of Economic Research that’s charged with pinpointing the beginning and ends of recessions. Most economists say the manufacturing sector is already contracting, but after decades of decline, manufacturing today represents just 14 percent of U.S. output. For the economy as a whole, most economists continue to see very slow growth during the first half of the year, with an upshift coming in the second half of 2001.
But even if this isn’t a recession to folks with Ph.D.s in economics, for us laypeople, it may feel scarily similar to one. That’s because real people seem to be less aware of whether the GDP is moving in a positive or negative direction than they are about the total momentum and movement in either direction. “How it feels to people seems to be more a function of change than of level,” says Allen Sinai, an economist at Primark Decision Economics.
Let’s throw some numbers around to demonstrate what he’s talking about. Early last year, the economy was growing at roughly 5 percent; today, if you believe Greenspan, it’s at zero. That’s a change of 5 points. Consider a hypothetical economy that was growing at 3 percent, and dipped down to minus 1 percent, for a total change of 4 points. The second economy has gone below-zero, and if it stayed there long enough, economists would call that a recession. But its overall change-4 percent-is less than the 5 percent slowdown suffered by the first, which is still in positive territory. So while it’s not a recession, to the man on the street, it still feels yucky. Think of it as a “virtual recession.”
Economists have a different term for this phenomenon: a “growth recession.” It refers to a period in which the economy doesn’t endure the six-month contraction required for the official R word label, but still suffers a slowdown that’s after a period of smart growth. Think of it as a rapid departure from expectations, the way parents feel about a kid who’s usually brought home straight As on his report card, but suddenly slips to B minuses. Or a car that decelerates suddenly to avoid an accident, sending Cokes into laps. Is it tragic? No. Unpleasant? You bet.
Economists don’t know a whole lot about growth recessions, in large part because they don’t happen very often. Several point to 1966 as the last time one occurred, but even they aren’t too sure. “There’s no question there are pauses in the growth process, where the economy is moving sideways rather than upward,” Hall says. “It deserves attention because it’s a meaningful event, but it turns out to be very hard to identify it.” The term is also left out of many economic texts because it tends to be politicized. By one account, the term growth recession itself emerged as a concept in the 1970s when liberal economists sought to criticize Richard Nixon for presiding over a rapidly slowing economy that failed to enter a full-blown recession. Eager to avoid even the modified R word term, Nixon’s economists shot back with a label of their own. The economy wasn’t in a growth recession, but a “crab-wise minislump,” they claimed. Mysteriously, that term failed to catch on.
Where do we go from here? Who knows. Despite its label as the “dismal science,” the actual practice of economics is really an art. Even Greenspan failed to recognize the recession of 1990-91 when it was already in progress. “If you look back [at forecasters’ records], they’re very embarrassing,” says Hall. “Crystal balls just aren’t very good.”
