Economist John Mitchell said he predicted the economy would slow last year, but he didnt know how much.
Mitchell, a consulting economist with U.S. Bancorp, was, as last year, the keynote speaker at the 2002 Business Outlook Conference in Brookings.
A high-energy speaker, Mitchell paced from one side of the room in the Brookings Elks Lodge to the other while reading a poem he wrote about the economy.
When finished, he said he had expected the national economy to slow, based on the monetary policy in 2000 when interest rates were raised.
He said there was actually an investment bust going on, but no one realized it until the 2000 growth rate of 5 percent was later revised down to 4 percent.
It was the end of exuberance, said Mitchell.
He said it proved the business cycle lives, even after a 10 year expansion.
People think the business cycle is dead whenever there is a long expansion, said Mitchell.
He said people thought that after a 106-month expansion in the 1960s. By the late 1990s, they were saying it was a new economy that didnt follow the old rules.
He said several factors contributed to the downturn.
A low snowpack in 2001 resulted in high electric rates, which was a shock to the system of the economy.
Spending on equipment and software dropped in 2001, as did investment. Mitchell said the Northwest economy was disproportionately large in those areas.
He said the net worth of the national economy rose by $5 trillion in 1999, fell by $.5 trillion in 2000, and fell another $2.5 trillion in the first three quarters of 2001.
Household debt-service payments were 14.5 percent of disposable personal income in 1987. That fell to 12 percent by 1994, but was back up to 14.5 percent in 2001.
He said the rate is still high, so he doesnt expect a huge snapback in consumer spending as the economy improves.
For all the problems in 2001, said Mitchell, the economy was still growing slowly, until Sept. 11.
He said the terrorist attack was a shock to the economy similar to the Iraqi invasion of Kuwait in 1990, several oil price increases in the 1970s and the Russian launching of Sputnik in the late 1950s.
It removed all doubt we were gonna have a recession, said Mitchell.
He said airlines and shopping centers shut down for a time. People were glued to their TVs, waiting to see what would happen.
It changed the world, said Mitchell. It was a short-term economic shock to the United States.
The recession didnt affect everyone equally. Mitchell said real estate sales remained good.
A recession with happy Realtors, he said. It was hard to imagine.
He said state and local governments are facing severe budget constraints because of the recession.
Exports and imports declined because it was the first synchronized global slowdown in 25 years, said Mitchell.
He said jobs are declining, and the airline and tourism sector has taken hits. Manufacturing is experiencing a broad-based decline.
Mitchell said the government may have had its finest hour in its policy response to the recession.
He said the Federal Reserve Board first cut interest rates on Jan. 3, 2001, and cut them a total of 11 times. He believes the cutting is over for now.
He said the funds rate dropped from 6.5 percent to 1.75 percent, the lowest rate in 40 years. Those rates made for happy Realtors and 0 percent auto loans, said Mitchell.
The point, he said, was that the Fed cut interest rates in January, but no one realized there was a recession until March.
He said conventional wisdom would dictate a tax cut or increase in government spending to even-out the economy.
That usually doesnt work, said Mitchell, because by the time the fiscal policy clears Congress, the recession is over.
It did work this time, he said, because the government just happened to be using an expansionary fiscal policy when the recession kicked in.
He said federal spending ratcheted up again after Sept. 11.
He said Congress may pass an economic stimulus package, shortly after the recession ends.
He advised keeping that stimulus package in perspective. Compared with the $10 trillion economy, he said, the $69 billion fiscal package is like a rounding error.
Mitchell said the recession will end when companies that have cut back on production have sold their inventory.
He said companies would also refinance to reduce their debt burdens. Some firms will restructure.
Eventually, he said, everything wears out and has to be replaced. Excess capacity will be absorbed.
People will want new inventions. Mitchell said he didnt even know last year that he would need an X-Box this year.
He also said energy prices are declining. The audience of 155 broke out in laughter. Mitchell said gas prices might be a bit steep in Brookings, but are dropping elsewhere.
He said those low energy prices contributed to a low inflation rate of 2.5 percent last year, and a predicted rate of 2 percent this year.
He said that is a far cry from the double-digit inflation of the late 1970s and early 1980s.
Mitchell said the economic data was negative eight weeks ago, but is mixed now. There are glimmers of good stuff, he said.
Mitchell said leading economic indicators have been rising for three months. The rate of decline in employment is dropping. Hours worked have stabilized.
Mitchell said consumer expectations are rising. He said the Christmas retail season was not as bad as feared.
Signs suggest the economy is bottoming out, he said, Probably in the first quarter. There are glimmers of rebound and strength.
Mitchell predicted it would be a different kind of upturn. He said housing wont come roaring back because it never really collapsed.
He said the auto industry seems to be holding up, but the 0 percent sales of 2001 came at the expense of 2002 sales.
He said the debt burden is still relatively high, which is a damper on consumer demand.