The answer is a little of both. On the psychological front, Americans have swung abruptly from the high of peace and prosperity to the dread of recession and war. On the statistical front, inflation, technological change and the shifting demographics of the U.S. work force have combined to make the economy look much stronger than it is.
The psychological part is simple. In August Americans were still enjoying an eighth straight year of growth and victory in the cold war. Then came the Iraqi invasion of Kuwait. The public, already reading about banking problems and a nationwide real-estate bust, saw oil prices double from $20 to $40 a barrel. President George Bush was suddenly dispatching half the entire Army, Navy and Air Force to the Middle East. “We’ve never seen confidence collapse this deep before an actual slowdown,” says Jason Bram of The Conference Board which tracks consumer attitudes. “We think the war threat, and maybe even this fall’s long tax battle, hurt confidence as much as economic weakness.”
Other depressants are also at work. One is the specter of the Great Depression. The collapse of the savings and loan industry and now news of giant banking losses from the real-estate crunch “may possibly be raising fears,” in the words of Victor Zarnowitz at the University of Chicago, “of a bank crash like the one in the ’30s, when unemployment hit 25 percent.” This is highly unlikely; besides, deposits are now insured. But the shadow of history has piled extra anxiety onto already exaggerated fears about the recession.
The worst slowdown since World War II, in 1982, raised unemployment from about 5 to 10.8 percent. (Average recessions create a 7.5 percent jobless increase.) Even then, only one person out of every 20 in the work force actually lost a job. The other 19 were untouched. In most downturns, “the overwhelming majority of persons go on doing what they are doing and getting paid what they are paid,” says Murray Weidenbaum of Washington University in St. Louis. “If inflation goes down as it usually doesaa in recessions, the average person actually comes out better off.” But this fact is getting drowned in anxiety. “The small chance of losing big through job loss is far more frightening than the hope of gaining a little from lower prices,” says Bram. “It’s just no contest.”
Measuring the overall economy has never been easy. But it has become increasingly difficult as the mix of U.S. output has shifted away from the manufacture and sale of countable products like shoes and shovels into less countable things like computerized banking transactions, hospital care and other services. Manufacturing once accounted for almost half of nonfarm employment; now it’s below 20 percent. The change has distorted initial reports of quarterly output, which in the third quarter still showed a 1.8 percent rate of expansion. More precisely measured parts of the economy–real personal income, total nonfarm employment, sales by manufacturers, wholesalers and retailers–all were negative in the third quarter. Bruce Steinberg of Merrill Lynch calls the third quarter GNP figure “a statistical artifact.” The fact that private payrolls shrank for the second successive month in October, Steinberg says, means “a recession began at least two months ago.” The failure of unemployment to rise when payrolls shrank (by 156,000 jobs for those two months) can be traced to demographics. The “baby bust” of the late 1960s and ’70s means many fewer young adults are entering the labor force right now.
The good news is that the labor-force slowdown will cushion the effect of job loss throughout the coming slump. But that’s small comfort to the thousands who have already lost their jobs–and many more who worry, rationally or not, that they might be next. As Weidenbaum points out, “It’s been a long time since we had [a recession], so we’re out of practice. Overreacting is wrong, but it always happens.”
GRAPH: Darkening Mood
The expectations index–based on predictions about business, jobs and income–is plumeting.
