Magazine article Real Estate Issues

Diagnostics Yield Prescription for Recovery. (Focus on the Economy)

Magazine article Real Estate Issues

Diagnostics Yield Prescription for Recovery. (Focus on the Economy)

Article excerpt

Diagnosis and prescription are distinct operations in economics as in medicine. But they had better be well related, or the patient may be in for a rough time. The economy, like the human body, has marvelous natural recuperative powers. Intervention, therefore, is indicated only when and to the degree that the course of treatment will enhance the healing process that occurs in due time. Hippocrates, after all, enjoined physicians, "First, do no harm."

Economists, in their shorthand, write the equation for national output as GDP = C+I+G+(x-i). Translated, that means Gross Domestic Product is composed of Consumption, Business Investment, Government Spending, and the Balance of Trade. Diagnosing the economic ills that threw the nation into recession involves a look at these specific components to see where the fever began, and where the symptomatic chills are worse.

During the tremendous economic boom of the '90s, two staples of my talks around the country were the comments that "we will remember these as the 'good old days,'" and "inflation in the fundamental economy is not a problem; it is only in the stock market that we see 'too much money chasing too few goods.'" Undoubtedly, the United States will be challenged to approach the combination of robust GDP growth, low inflation, low unemployment, and substantial, sustained productivity gains that characterized the past decade. It is not impossible, though it will take a combination of skilled public policy planning and execution, sustained business management for long-term profit growth, and some luck on the world scene. I will deal with these topics in the 2002 series of columns for Real Estate Issues. Presently, I'd like simply to do some of the diagnostic work.

Where did the recession come from? Despite the decision of the National Bureau of Economic Research that the downturn started in March 2000, the causes of the recession need to be placed both before and after that date. The economy had been placed in fragile health by the overheated stock market (see Exhibit 1: "Trends in Stocks and Bonds"), epitomized by the NASDAQ bubble but spread throughout all the major indexes, including the broad-based S&P 500, which doubled in price between 1995 and 2000. While U.S. corporations were arguably much stronger at the end of the decade, there was no way that they were worth twice their 1995 value. So a full year before the "official" recession date, Wall Street was reeling in financial assets, and strapping the economy's strength. It's not for nothing that the S&P 500 is included in the Index of Leading Indicators.

As 2000 progressed, businesses started to pay stricter attention to inventory volumes (see Exhibit 2: "Inventory Correction--With a Vengeance"). Wholesalers led the trend from mid-2000 onward, and were joined by retailers and manufacturers as the year turned into 2001. What were the numbers? Immense. Inventories of all private businesses plummeted at a rate of $27.1 billion in the first quarter of 2001; $38.3 billion in the second quarter; and $61.9 billion in the third quarter.

So the "I" component of Gross Domestic Product was under considerable stress, even as the "G" component was producing "drag" in the form of federal budgetary surpluses. (When the government takes in more money than it spends, that counts as a negative in the GDP calculation.) And foreign trade (the [x-i] component) was producing disastrous figures. By 2000, our current account deficit was more than $450 billion; seven times the level of 1991 and three times as large as in 1995. …

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