Where's Our Economic Recovery?
Last month, the National Bureau of Economic Research (NBER), a private organization that analyzes American business cycles, announced that the U.S. recession ended in November 2001 and that the economy is now beginning to rebound. A rebound makes some sense: In the second half of 2003, a combination of powerful stimuli will be entering the American economy, providing the best chance since the 9/11 attacks for the nation to return to 1990s growth rates.
Yet despite the NBER report and the influx of stimuli, many economists and businesspeople remain doubtful that a full recovery is in the cards. Many entrepreneurs have thus far been unable to address the factors that caused the recession. As a result, most small businesses have not begun hiring again. In fact, some entrepreneurs actually are preparing for the stimuli to fail and are digging in for a long economic slowdown. "I wouldn't call it pessimism, but there's a kind of continued edginess and fear about the future in the small-business community," says Joel Marks, executive director of the American Small Business Alliance, a Washington, DC, trade group.
There is a possibility that the U.S. economy will take off in the second half of 2003. President Bush's most recent round of tax cuts, which included some cuts of taxes on capital gains and dividends, will pump at least $60 billion into the economy in the third quarter of the year. These cuts may boost consumer spending, which has historically been one of the main drivers, along with business investment and foreign capital, of the U.S. economy.
Meanwhile, the Bush administration plans to boost military spending in the second half of 2003 and the first half of 2004, and new regulations that foster greater competition in military contracting may allow smaller companies to compete on a more even playing field for these deals. The Federal Reserve has cut interest rates to their lowest point since the 1950s, and Fed Chairman Alan Greenspan has indicated that he is willing to cut even further in order to goose the economy. And the continuing decline of the U.S. dollar against other major currencies like the euro and the yen--the greenback has dropped more than 10 percent against the euro so far this year--will help American exporters. "The dollar should fall significantly. It looks like it will decline more, and that will help companies in the fall," says Christian Weller, an economist at the Economic Policy Institute (EPI), a Washington, DC, think tank.
And as Edward Hudgins, Washington director of the Objectivist Center, a Poughkeepsie, New York, think tank, notes, trade-resistant policies that might hinder American exporters--such as bills currently in Congress designed to shield some manufacturers from foreign competition--probably will go nowhere. "These policies always get pushed out around election time and in the wake of a recession," Hudgins says. "But they don't normally go far."
At the same time, the Bush administration is increasing tax write-offs for small companies making new capital investments, a trigger that may be prompting even some cash-strapped entrepreneurs to consider buying expensive new items. In a survey completed in July by Hewlett-Packard, nearly 50 percent of small businesses questioned said that today is a favorable climate for small companies to invest in new capital, and more than 40 percent said they planned to make computer technology purchases relatively soon. And last month, the SBA reported that loans to small companies rose by more than 30 percent between October 2002 and July 2003, suggesting that some firms are making new investments.
Some indicators suggest that a recovery is already underway. The Conference of Mayors, an organization of leaders of metropolitan areas, has predicted that metro areas' economic growth rates will be higher in 2003 and 2004 than in 2002. The Dow Jones and the Nasdaq have posted major gains this year, with the best-known technology stocks gaining more than 30 percent in the past four months. In a recent USA Today survey of economists, the 67 analysts polled expected the economy to grow more strongly in the second half of 2003 than it did during the first half of the year. Meanwhile, in May and June retailers in key industries such as electronics, home construction and clothing posted gains in sales, suggesting that consumer spending has remained relatively strong. "If you compare America to any other country in the world, by any standard, our economy is doing reasonably well," says Hudgins.
What's Standing in the Way
Yet though the economy has begun expanding again, it has not grown fast enough (it grew by only 2 percent the first half of 2003) to allow most companies to address the key factor that caused the recession--excess inventories--and return to a solid base of profitability. Huge state budget deficits have hindered the economy's growth, as states and municipalities cut spending just as the federal government provides tax cuts and spending. Other major economies such as Japan and Germany remain stuck in low-growth cycles, unable to help boost American exporters. The majority of the tax cuts passed by the White House may not help small companies, Marks says, because they'll go to upper-income Americans who historically save money from reduced capital gains taxes rather than going out and spending the windfall. And as Weller notes, though the greenback has fallen against other leading currencies, "there's still not enough momentum for the kind of sharp decline in the dollar that would really boost exports and trade and allow companies to draw down inventories."
Consequently, though some entrepreneurs may be considering new capital investments because of government incentives, economists say that, despite the recession and reductions in business stocks and capacity, small companies still are carrying larger inventories and higher debt burdens than they did five years ago. "I know almost no small businesses that have slashed their inventories enough to be able to make new investments," says Marks. "Everyone is still struggling, not planning for the future but just trying to make it today. That group [the NBER] that says the recession is over--I don't know what universe they're in. They don't understand the situation on Main Street."
Unable to slash inventories and become profitable again, and aware of workers' productivity gains, most entrepreneurs do not plan to hire new workers in the near future. In the early 1990s, small companies led the recovery, becoming the first to hire new workers and ultimately pulling the economy out of the doldrums. But today, the story is different: In the same Hewlett-Packard survey, 58 percent of small companies polled said now was a bad time to hire new employees. In fact, analyses by the EPI show that over the past six months, "labor market trends have grown somewhat more negative"--that payrolls lost more jobs between December 2002 and June 2003 than they did during the previous six months. In July, EPI President Larry Mishel told the Financial Times that the employment climate is "the greatest contraction in private-sector employment since the Great Depression."
Some economists fear these trends are leading to longer-term unemployment problems in which many Americans simply take early retirement or otherwise give up looking for jobs. "As the distribution of income widens and the economy weakens, more people are asking themselves whether they can traverse these barriers," says Andrew J. Rettenmaier, associate director of the Private Enterprise Research Center at Texas A&M University, in College Station. And once skilled laborers decide they can't find a job and leave the work force, it is difficult for American companies to rebuild that intellectual capacity, Weller says, thereby limiting economic recovery. "Physical capacity like building a new plant is easily recoverable, but skilled labor is not," he says.
With entrepreneurs unable to significantly slash inventories, book profits or hire staff, they are increasingly planning for long-term economic weakness--a situation Greenspan has dubbed "pervasive caution" on the part of American companies. A central part of this planning has been increasingly competing for customers on price, a dangerous trend that could only exacerbate the economy's problems. "People have gotten used to operating in a poor economic climate" and are making changes to anticipate it continuing indefinitely, Marks says. But by slashing prices in an attempt to boost sales and return to profitability, economists warn, companies could foster national deflation, in which prices for most consumer goods fall. As happened in Japan in the 1990s, in a deflationary cycle, consumers don't continue opening their wallets because they expect prices to keep dropping, firms cannot boost their profits and cut inventories, companies cannot afford to hire new workers, and increased job and wage reductions further dent consumers, continuing the devastating cycle.
Yet despite some bleak indicators, some entrepreneurs remain hopeful that the second half of 2003 will deliver the kind of growth needed to allow them to slash inventories and even begin hiring again. Some believe the Bush administration's recent trip across the heartland, in which Cabinet members held small meetings to listen to the concerns of entrepreneurs, will result in more government assistance for small companies, such as an increased focus on high health-care costs and American pressure on China to revalue its currency, which would make Chinese exports more expensive. Others have been heartened by the fact that factory orders rose slightly last month, a sign that the manufacturing sector, long the bellwether of economic recovery, may finally be righting itself.
Joshua Kurlantzick is a writer in Washington, DC.