Recovery Or Recession?

We are at a loss for words. If nothing else, this baffling economy has defeated the vocabulary of economics. We are supposed to be in a "recovery," but it doesn't feel like one. The stock market is down 26 percent this year and has lost $3.4 trillion in value, reports Wilshire Associates. The weekly initial claims for unemployment insurance, after receding earlier this year, have climbed again above 400,000. Consumer confidence has declined for four consecutive months.

Our language seems increasingly disconnected from ordinary life. The standard phases of the business cycle suggest simple rhythms of pain and pleasure. Recessions are bad; recoveries are good. The boundaries are neat. But the reality is usually murkier. The boundaries aren't so neat and our labels often mislead.

Even when the economy underperforms--is clearly in recession--prosperity is widespread. Most people remain employed. Almost all are spared historic hardships (starvation, homelessness). Most enjoy unprecedented material well-being. Just last week the Census Bureau reported that inflation-adjusted median household income had dropped 2.2 percent in 2001 to $42,228. Still, that was almost 25 percent higher than in 1975. Married couples have an astounding median income of $60,471 (meaning half of couples are above that and half below). The inflation-adjusted gain since 1975 is 40 percent.

The rhetoric of recessions is usually, though not always, worse than the reality of recessions. Since World War II, recessions--signifying falling production and rising unemployment--have become less frequent and milder. From 1946 to 1998, the economy has spent about 15 percent of its time in recession, reports economist J. Bradford DeLong of the University of California, Berkeley. From 1901 to 1930 the comparable figure was 30 percent.

It seems ungrateful not to acknowledge our good fortune. But we don't. Americans feel entitled to an anxiety-free affluence. The mere existence of the business cycle offends those expectations. It sows uncertainty and shakes our sense of serenity. Even the declaration of a "recovery" usually isn't reassuring because, in its early stages, the recovery doesn't differ much from the preceding recession.

This is surely true now. One hour brings good news, the next bad. Last week: early Thursday, the government reported that new-home sales had risen 1.9 percent in August to 996,000 (at an annual rate). Later that day, SBC--the phone company--announced 11,000 layoffs. And there's the stock market. Barring a big rally, the market will decline in 2002 for the third consecutive year. According to Howard Silverblatt of Standard & Poor's, the last time the S&P index of 500 stocks fell for three straight years was from 1939 to 1941 (the declines were 5.5 percent, 15.3 percent and 17.9 percent, compared with 10.1 percent and 13 percent for 2000 and 2001).

The false precision of our economic language dates only to the last 50 years or so. Before that, language was less scientific. In the 19th century "people knew there were good times and bad times. The metaphors they used were more biological," says economist Philip Mirowski of Notre Dame. "People had an image that [industry] had eaten too much and thrown up." To wit: companies had produced more than people would buy; gluts led to "depression"; prices, profits and production declined.

In 1913 Wesley Clair Mitchell, a professor at Columbia, published his classic "Business Cycles and Their Causes," which began: "Between 1890 and 1910 the United States had five seasons of business revival following upon periods of business depression." The seasonal analogy depicted a gradual shift from depression to prosperity. But it was Mitchell who pioneered better statistical measures of business cycles. In 1946, he and Arthur Burns (who later became chairman of the Federal Reserve) completed a chronology of 22 U.S. business cycles from 1854 to 1938. Each had exact starting and stopping points.

Ever since, the National Bureau of Economic Research--an academic group that Mitchell helped found--has designated the beginning and end of recessions. ("Depression" slipped from the vocabulary because after the Great Depression of the 1930s, "everything else was so mild,'' says Harvard economist Gregory Mankiw.) The NBER usually delays its dating until well after the fact. It says the last recession began in March 2001 and hasn't declared an end. But most economists have argued that the recovery started in early 2002.

The label doesn't yet fit. The problem transcends confusing economic indicators and the uncertainties of a possible war in Iraq. This business cycle has distinctive features: the size of the stock market decline; the economic weakness in Europe and Japan; the magnitude of the telecommunications collapse. These features confound comparisons to the recent past because they're so different from what we've experienced since the end of World War II. All the charts and experts can offer only little guidance. It suggests that this cycle may still surprise, and, perhaps, unpleasantly.