Rethinking the Recession

That's apparent in the gloomy reports on hiring, spending, and production in the national economy in February.   There's really only one way to describe the state of the economy these days -- it's just plain sick.  Whether this lull reflects our apprehensions over the situation in Iraq , or something that will be longer-lasting, remains to be seen.

In the meantime, the retail sector of the economy is taking a beating.  Preliminary data on retail sales showed a 1.7 percent decrease in February, the sector's worst monthly decline since the aftermath of the September 11 terrorist attacks.  Automobile dealerships led the way downward with a 3.4 percent decline in sales, but no segment of the economy was immune.  With a 18.8 percent plunge in the Conference Board's Consumer Confidence Index for the 

That fact, perhaps more than anything, helps explain the surprisingly large loss of jobs across the economy in February.  In the normal course of events, the second year of an economic recovery could be expected to produce signs of a turnaround in the job market.  Instead, the Bureau of Labor Statistics delivered the sobering news that there were 338,000 fewer workers on national payrolls last month.  Two thirds of the lost jobs were in the services-producing side of the economy, led by a 1.0 percent cut in the workforce of restaurants.

One message from this, of course, is crystal clear.  The economy needs consumers to spend money.  If the threat of war is what is making us sit on our pocketbooks, then a resolution of the uncertainty that haunts us today may wipe out these losses in quick order.  That would make this a small bump on the road to economic recovery that many of us foretold at the close of last year.

And not all reports for February were as gloomy.  Excepting the volatile motor

vehicle industry, which stumbled last month, the Federal Reserve's Industrial Production Index for manufacturing showed output growing at a modest 0.2 percent.  Particularly heartening was the continued pickup in the electronics and computer industry, whose growth has accelerated in recent months.  The signs are promising that the first quarter of 2003 will see another increase in spending by businesses.

But that wouldn't be enough to offset a train wreck in consumer spending, should that calamitous event be in the offing.  Here the message in the recent data gets a lot harder to read.  By all accounts, the hiatus in spending we see today is a temporary product of our collective concern over the buildup of troops surrounding Iraq .  But if that thought gives you comfort, remember this.  The capacity of the still-fragile U.S. economic recovery to absorb losses like we saw last month is limited. We just went through a recession that was painful enough, even though consumer spending never stopped growing.  The chance to learn what a second downturn would be like, without that important lifeline, would be very unwelcome.

Patrick M. Barkey