The Economy: Just Like Last Year?

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Post-Christmas, a mixed retail bag

Just three days in, this brand new economic year is already starting to look very familiar.

Not that any economic forecasters are penciling in another terrorism tragedy like Sept. 11 — in fact, the possibility of more terrorism at home doesn't really appear in any figurings. But think back to this time last year — in January 2001, the economy was clearly catching at least a vicious winter cold. Manufacturing was contracting. Stocks were sluggish. On Jan. 3 Alan Greenspan picked up the phone and called in an emergency 50-basis-point rate cut to try and nip the gathering contraction in the bud. Economists, analysts and business journalists were agreed that we were in for a sharp slowdown, maybe even a recession. But it would be the briefest of downturns; maybe a quarter or two, tops, with recovery setting in by August.

That recovery never came. Sept. 11 did. The lows got violently lower, the pace of layoffs and bankruptcies picked violently up. The recession (which was now back-dated to March) was definitely going to be a painful one, and the recovery from the dot-com bust of 2000 and its spinoff, the telecom bust of 2001, got postponed by a quarter or two.

Or maybe more. Because as 2002 gets underway, stocks are sluggish. Manufacturing is contracting. And whereas just last Friday a spate of economic reports — consumer confidence, housing, manufacturing — had investors writing in the recovery in pen, the first trading day of the new year is featuring the beginnings of a pretty stern reality check.

Wednesday, analysts downgraded AOL Time Warner (parent company of this writer), actually slapped a "sell" — and a bankruptcy warning — on Kmart, and even pooh-poohed sole Internet survive-and-thriver eBay, just weeks before what everybody expects to be one depressing Q4 earnings announcements. And it's not just the rear-view — few expect the corporate-earnings recession to reverse itself with much drama. The 2002 graph should be slanted up — it'd be hard to slant down after the last year and half — but it looks like it'll be a pretty gentle grade.

We've met the enemy?

And even the recovery hopes are putting a damper on the recovery hopes. Expectations of a better economy in 2002 — and of big budget deficits for years to come — have prompted the bond markets to bid up long-term interest rates up nearly a full percentage point since early November. Long-term interest rates, of course, are otherwise known as mortgage rates — the ones that keep consumers buying homes, refinancing mortgages and generally feeling flush. They have an annoying tendency to act independently of Greenspan's wishes. And expensive money for borrowing consumers — and borrowing corporations — are nobody's idea of economic rocket fuel.

Still, the recession does appear to be primed to at least start receding very soon. Another report on manufacturing from the National Association of Purchasing Managers — which now wants to be known as the slightly Orwellian-sounding Institute of Supply Management — announced that the sector's monthly contractions got smaller again in December, pushing the group's index to 48.2 from 44.5 in November. Which is almost 50, which is almost an expansion again. And the "new orders" component for the month, the most forward-looking part of the report, actually rose above that crucial halfway point. And semiconductors, the commodity to watch for tech's 2002 fortunes, also got a good grade Wednesday when the Semiconductor Industry Association said that chip sales rose 1.6 percent in November to $10.6 billion.

Manufacturing started its recession before anyone else — this was the NAPM/ISM's 17th straight report of a monthly contraction — and it's been the hardest hit. If it can get back in the black, it'll likely lead the rest of the economy back with it. And that process looks poised to begin.

In for the long haul

But it could be a real grind-it-out comeback. Although consumers have been pretty stalwart, considering, about doing the patriotic thing and spending their money, the job market is still a very scary place, and the emotional pallor of the post-Sept. 11 world still means a damper on traffic at the malls. (Just ask retailers this winter. Or better yet, look at their discounts.) Consumers, accounting for two thirds of U.S. economic activity and generally very conscientious about it, have pulled us through one potential economic crisis after another through the 90s, and they can't be blamed for the trouble we're having these days — it'd be a lot worse if not for them. But to expect spending and demand to light a blaze under the economy this spring is asking an awful lot.

Particularly when the stock market seems to have settled into its own slow grind. The dramatic run-ups of post-Sept. 11 took a huge bite of 2001's stock losses, but all three major indexes still posted losses for the second straight year. Another three bears in 2002 would make it the first three-year losing streak since 1941. And more than a few forecasters — seeing disappointing corporate earnings, still-shell-shocked capital spenders and languid consumer demand — are predicting just that.

The majority of them, though, see the glass half full and the water level creeping up. Targets for the broad S&P 500 generally call for a 5-10 percent improvement in 2002 as investors and corporate officers alike see business conditions getting better and better as the year goes on, and the next economic expansion starts to take shape. Sure, it'll be an expansion without a peace dividend, weighed down by defense and security spending and a travel industry that may have suffered permanent damage this year, and constantly in danger from economies in Japan, Europe and Argentina that are still getting worse even as the U.S. one starts to look better.

Our crystal ball

So what's 2002 look like? Figure on this spring being almost indistinguishable from this winter, no matter what the economic indicators say — particularly as unemployment continues to rise (because labor costs are always the last ones invited back to companies hoping to impress Wall Street with their bottom lines, high unemployment generally outlasts recessions). Summer will likely see GDP growth creep back up above zero, and by fall, third-quarter profits and production may start to look rosy again. At which point companies will start hiring again, and consumers will feel secure again, and by the beginning of the following year the economy should be chugging along again at a modest-but-welcome 3 percent or so.

Of course, that's what everybody said last year.