Is America talking its way into a recession?
Spin and hype are increasingly indicators of economic health, which worries some.
The economic prognosticators may be talking doom and gloom, but Tom Fisher doesn't see it that way. Standing in a showroom full of new Buicks, Mr. Fisher, general manager of Chevy Chase Cars in Bethesda, Md., explains that his dealership is having a good month, and business is picking up as the spring buying season nears.
Why should you care what Tom Fisher says? For starters, Federal Reserve Chairman Alan Greenspan does. Every few weeks the Federal Reserve's office in Richmond, Va., calls to check on how Fisher is doing. His dealership is part of an informal national economic survey the Fed does each month.
But despite his relatively sunny outlook, Fisher is starting to worry. Not about his business so much as the perception of where the economy is headed. The constant business chatter and headlines focused on a looming recession may end up creating a problem that doesn't really exist. "Are we headed for a recession? I don't know. But all the coverage the media give to recessionary talk doesn't help much."
Welcome to the first soft economy of the new media world, where economic forecasting, more art than science, has become more complicated than ever. Economic health has always hinged to an extent on psychology, but increasingly, spin and hype may be America's leading economic indicators. And some economists wonder if we as a nation have developed the ability to talk ourselves into a recession.
In his testimony to Congress yesterday, Mr. Greenspan said he will keep a close eye on consumer confidence - which he considers a key factor in whether the economy turns.
The latest bit of bad news came Tuesday, when monthly consumer confidence numbers reached their lowest point in four years. Although they measure only feelings, those feelings may be more important than ever. The stock market has become increasingly relevant to the American public and the media.
In 1989, just before the nation's most recent recession, about 31 percent of American families had stock holdings. That number is now estimated at more than 50 percent. At the same time, CNBC, the 24-hour business cable network, which debuted in 1989 in about 6 million homes, is now available in more than 77 million homes in the US.
The hiccups of the Dow Jones Industrial Average and the Nasdaq, once the province of brokers and a well-to-do few, have become the subject of hourly headlines. Once a negative wave gets going, it can build on itself quickly.
"There is at least the possibility we could be talking ourselves into a recession," says Alan Blinder, a Princeton economics professor and a former member of the Federal Reserve Board of Governors. He is skeptical that talk could do the economy in, but cites the University of Michigan's consumer survey: The consumer conditions index, which indicates how individuals rate their current economic situation, is still pretty solid, while the consumer expectations index, which shows the public's forecast for the national economy, is much weaker.
"That latter number is being influenced by all this talk about a recession," Mr. Blinder says. "And the leader right now seems to be the president of the United States, which is quite disquieting." Indeed, George W. Bush has somewhat eagerly jumped on the slowdown bandwagon, saying there is a warning light "flashing on the dashboard" of the economy. It's perhaps not surprising. Nothing can make someone a one-term president quicker than a recession. He also wants to garner support for his proposed $1.6 trillion tax cut.
Others believe the current recession talk can't really push the economy into a trough - but might leave a dent. Richard Curtin, who oversees the University of Michigan's Survey Research Center and its consumer confidence survey, says the effect of the news media tends to be overemphasized. But he acknowledges that "Bush's response to consumer concerns has put an official stamp on it," and the media coverage has exacerbated it. "We have declined faster than we normally would have."
True, the economy has slowed in the past few months. Economic growth went from 5.6 percent in the second quarter of last year to 1.1 in the final quarter. Numbers coming out this week could show slower growth. Unemployment numbers, meanwhile, have slowly begun to tick upward.
But buried in all the figures is a more muddled message.
Fisher, for instance, says it's true his dealership has not bought any new cars from General Motors in the past three months - and that is actually how GM registers a sale. But at the same time, he is currently carrying 10 percent less stock than he was a year ago.
The practice of carrying smaller, tighter inventories - which is becoming more commonplace - means factory production slows more quickly when demand eases, but it also means production may again rise quickly when people start buying. Greenspan spoke to Congress of this factor yesterday.
Actually, the auto industry is forecasting its third-best year on record, with 16.3 million new vehicles sold. The problem: the closest years of comparison, 1999 and 2000, were the record years.
And while Manpower Inc., an employment services firm, recently announced that its survey of 16,000 companies showed that a "slowdown lies ahead," 28 percent of the companies surveyed said they planned layoffs.
"We've turned the corner from an insatiable market to a more cautious one," says Manpower president Jeffrey Joerres. But, he adds, unemployment and inflation remain low, and the long-term prognosis looks good.
Still, doubts remain among consumers. And as President Bush begins pushing his tax-cut plan in the coming weeks, many of the questions will likely center on the plan's ability to put out the flashing light Bush regularly mentions.
In terms of the cuts' economic effects, most economists agree the amount of money they would return to consumers is not large enough to make a big difference. A recent study by BusinessWeek magazine found that, even if the cuts were enacted retroactively, they would amount to about $30 billion, not a significant amount in a $10 trillion economy.
"If a tax cut was enacted tomorrow, it might have an effect on this weak patch," Blinder says. "But ... it probably wouldn't be until June or maybe July, and that would be too late."
A cut's psychological effects are harder to calculate. It's possible that Bush's proposal could serve as a kind of chicken soup for the economic psyche. But Professor Curtin, for one, is skeptical. "Building negativism is a fairly easy proposition," he says. "Building optimism is a long, hard process."
(c) Copyright 2001. The Christian Science Publishing Society