The "R" word

By Peter Bradley, Editor in Chief -- Logistics Management, 1/1/2001

After a long spell of prosperity, the nation appears to have entered an economic downturn. Job creation has fallen off sharply, while layoffs are rising. Major companies that have enjoyed long periods of rising profitability were issuing earnings warnings as the year waned. High energy prices threatened a further drag on sales and earnings. Many of the dot-coms that were hot a year ago burned out in a hurry. Nervous investors have sent markets downward, reducing the value of who knows how many 401K balances, thus rattling consumer confidence. Shipping during the holiday season was relatively flat, compared with 1999 levels, indicating that consumers did indeed cut back. Some economists, again earning their moniker as practitioners of the dismal science, were already using the dreaded "R" word, saying the nation had slipped into recession.

Over the last 19 months, the Federal Reserve, worried that fast growth would lead to inflation, has worked hard to put the brakes on the economy. To this end, it raised the federal funds rate (the rate at which banks lend each other funds overnight) in six steps by a total of 1.75 percentage points.

Well, the brakes are on. The Fed has had a long run of success in keeping inflation under control without sending the economy into a downward spiral. But its efforts may have gone too far, and any correction will need some time to take effect. The Federal Open Market Committee, which sets Fed policy, acknowledged last month that it now viewed the risks of economic weakness as a greater danger than inflation. Even so, it did not reduce interest rates, and the markets reacted predictably by dropping sharply. Any action the committee takes when it meets at the end of this month will be watched closely. Now that the idea of using government fiscal policy as a means of economic intervention is as dead as John Maynard Keynes, the Fed's monetary policy has become the principal means of intervention in the economy.

But wait. Is the hand wringing over a pending recession overstated? At last report, the economy was still growing at a rate of about 2.5 percent a year and the nation remained near full employment. We have yet to see that measure of recession economists refer to by the oxymoron "negative growth." There are sufficient reasons for concern, certainly, and for those who have lost their jobs, the recession is in full swing. And fears of a recession may be enough to bring it on as expectations of a slowdown cause businesses, investors, and consumers to pull back. Let's hope the Fed cuts rates later this month. But let's not forget that although the halcyon days of economic growth may be behind us for now, the nation is more prosperous than ever.