speeches · January 10, 2002
Speech
William Poole · President
What Is Happening in the U.S. Economy?
AAIMManagementAssociation
St.Louis,Missouri
January11,2002
Everyonewantstoknowwhatishappen- slowdowndidmaterialize,butitalsopersisted,
ing to the economy. So do I. I’m pre- ashadnotbeenanticipated.Thebottomofthe
sumedtoknow,whichiswhyIamhere projected“V”cametolookmorelikea“U”as
this morning. But the fact is that I am forecastersadjustedtheirprojectionsofarecovery
as curious as you to find out the answer to the furtherintothefuture.AslateasAugust,fore-
question. Although I do not have a working casterscontinuedtoprojectnear-termrecovery
crystal ball, I can offer a perspective on where withoutarecession.TheBlueChipconsensus
we are right now and on how we got here. I can forecastreleasedonSeptember10projected2.9
also offer a perspective on why economic fore- percentrealgrowthfor2001:Q3and3.6percent
casts are as hazy as they are. realgrowthfor2001:Q4.
Beforeproceeding,Iwanttoemphasizethat AllbetswereoffasofSeptember11.The
theviewsIexpressherearemineanddonot tragiceventsofthatdaywereunprecedentedand
necessarilyreflectofficialpositionsoftheFederal createdanenvironmentwhereforecastershad
ReserveSystem.Ithankmycolleaguesatthe
norelevanthistoryonwhichtobaseprojections
FederalReserveBankofSt.Louisfortheircom-
ofthefuturecourseoftheeconomy.Forecasters
ments,andespeciallyBobRasche,directorof
quicklyconcludedthatthelossesoflives,property
Research,forhisextensiveassistance,butIretain
andjobsinNewYorkCityandthedisruptionto
fullresponsibilityforerrors.
transportationnetworks,particularlyairtravel,
I’llbeginthismorningbyreviewinghowthe
wouldtriptheeconomyintoarecession.Con-
U.S.economygottoitscurrentstate.Then,I’ll
siderableuncertaintyprevailedaboutthedepth
discusstherangeofpossibleoutcomesforthe
anddurationofsucharecession.Thedispersion
economyoverthenextyearorso.Finally,I’ll
offorecastsfor2001:Q4and2002:Q1wasmuch
makeafewgeneralcommentsonforecastuncer-
widerthantypicallyoccurs.
taintyanditsrelevanceformonetarypolicy.
InapressreleasedatedNovember26,2001,
theBusinessCycleDatingCommitteeofthe
NationalBureauofEconomicResearchannounced
HISTORY
thatithaddeterminedthatarecessionwasin
Astheyear2000cametoaclose,theconsen- progressandcalledthecyclepeakatMarch2001.
susoutlookwasthattheeconomywouldslowin Itisimpossibletoknowwhetherwewouldhave
thefirstfewmonthsofthenewyear,butthatthe hadanofficialrecessionwithouttheterrorist
slowdownwouldbeabrief“V”shapedevent attacks;clearly,theeconomywasnotperforming
thatwouldnotendadecadeofeconomicexpan- well.Wemightstillhavehadarecession,orper-
sion.TheBlueChipconsensusforecastreleased hapsjustapronouncedflatspotinacontinuing
onJanuary10,2001,projected1.9percentreal expansion.Intheevent,theterroristattacksdid
growthfor2001:Q1,increasingto3.1percentby occurandtippedtheeconomyoverratherdeci-
2001:Q3.Astheyearprogressed,theanticipated sivelyintoarecession.
1
ECONOMICOUTLOOK
Thecurrentrecessionhassomefairlystandard continuedtoliquidateinventories,andbyincreas-
featuresandsomethataredecidedlyatypical.It inglylargeamounts.Althoughwedonothave
isnotunusualforspecialeventstotipasoftecon- officialdatayet,forecastersbelievethattherate
omyintorecession.Iraq’sinvasionofKuwaitin ofinventoryliquidationwaslargeryetinthe
August1990isanexample.Inthatcase,thecycle fourthquarter.
peakisdatedJuly1990.Anotherexampleisthe Theimportanceoftheinventorycyclecanbe
GeneralMotorsstrikethatranfromSeptember shownwithafewnumbers.Usingquarterlydata,
1970toJanuary1971;withoutthestrike,wemight thepeakquarterwas2001:Q1.Areasonableguess
nothavehadarecessionthatistodaydatedas for2001:Q4putsthedeclineinrealGDPfromthe
havingacyclepeakinDecember1969andcycle firstquarteratonly0.7percent.However,that
troughinNovember1970. declinewasmorethanaccountedforbyinventory
Failuretopredictaturningpointinthe liquidation.Overthisperiod,finalsaleslikely
economy,orevenrealizeforseveralmonthsthat roseslightly,by0.2percent.Expressedatan
apeakhasoccurred,istypical.Missingtheonset annualrateoverthesethreequarters,inventory
ofarecessionissometimesduetounforecastable liquidationknockedabout1.2percentagepoints
events,suchastheterroristattacks,butmore offtheeconomy’sgrowthrate.
generallytoincompletescientificknowledgeof Theinventorycycleisastandardfeatureof
howtheeconomyworks.Considertheminutes almostallrecessions.Atsomepoint,firmsget
oftheAugust21,2001,FOMCmeetings,which inventoriesdowntodesiredlevels,andproduc-
statedinpartthat
tionthencatchesupwithfinalsales.Assuming
Thestaffforecastpreparedforthismeeting thatfinalsalesgrowthoccursthisyearatamodest
suggestedthat,afteraperiodofveryslow pace,asmostforecastersexpect,therecession
growthassociatedinlargepartwithveryweak willcometoanaturalendwheninventoryliqui-
businessfixedinvestmentandtosomeextent dationiscomplete.
withaninventorycorrection,theeconomic Inmanywaysthough,thecurrentrecession
expansionwouldgraduallyregainstrength
isatypicalofU.S.economichistory.First,indus-
overtheforecasthorizonandmovetoarate
trialproductionpeakedinSeptember2000,well
aroundthestaff’sestimateofthegrowthof
inadvanceofthecyclepeakdate.Second,housing
theeconomy’spotentialoutput...
investment,whichhistoricallyhasbeenaleading
IntheCommittee’sdiscussionofcurrent
indicatorofacyclepeak,hasremainedonahigh
andprospectiveeconomicdevelopments,
manyofthememberscommentedthatthe plateauthroughout2001.Bywayofcontrast,
anticipatedstrengtheningineconomicexpan- considerthe1990-91recession;housingstarts
sionhadnotyetoccurredand,indeed,thatthe peakedinJanuary1989,wellbeforethecycle
economyandnear-termeconomicprospects peak,andbyJanuary1991haddroppedby51
appearedtohavedeterioratedmarginallyfur- percent.
therintheperiodsincethepreviousmeeting.
Third,consumerexpendituresonlightvehi-
Anotherdimensionofthe2001recession, cleshavecontinuedatnearrecordlevels,albeit
typicalofpastcyclicalbehavior,isthatsubstantial withconsiderablesupportthroughpricereduc-
inventoryaccumulationoccurredastheeconomy’s tionsintheformofzero-interest-ratefinancing
growthrateslowedin2000.Becauseinventories and/orsubstantialrebates.Datareleasedlastweek
hadaccumulatedbeyondthelevelsfirmswanted, indicatedthatsalesoflightvehiclesduring2001
theybegantoreduceproduction.Inthefirst weresecondonlytotherecordsalesin2000.
quarterof2001,thisprocesshadreachedthe Moregenerally,durablegoodsconsumption
pointthatfirmscutproductionbelowthelevel expenditures,whichtypicallydeclinesubstan-
offinalsales,sothatinventorieswereactually tiallyduringarecession,havehelduppretty
reduced.Inthesecondandthirdquarters,firms wellthistime.
2
WhatIsHappeningintheU.S.Economy?
Fourth,productivitygrowthhasremained Letmenowlinkthedeclineinmarketinter-
strongdespitetheslowdowninrealgrowth.There estrateswellinadvanceofthecyclepeaktoFed
hasbeendebateinrecentyearsabouthowmuch policyactionslastyear.Ibelievethatthemarket
ofthestrongproductivitygrowthhasbeencyclical. understandsquitewelltheFed’smodeofsetting
Thetypicalcyclicalpatternisthatproductivity atargetforthefederalfundsrate.Thatis,the
growthfalls,orevenbecomesnegative,asthe marketunderstandsthepolicywithinwhich
economyentersarecessionandthenrecoversas individualpolicyactionsfitinaconsistentand
anexpansiontakeshold.Productivitygrowth coherentway.Giventhisunderstanding,themar-
slowedinthemiddleof2001,butcontinuedat ketbroughtdowninterestratesinadvanceof
anannualrateof1.5percentforthenonfarm Fedpolicyactions,becausethemarketsensedthe
businesssectorand2.5formanufacturingin
economy’sslowingandwasconfidentthatthe
2001:Q3.Thesearehealthyratesofproductivity
Fedwouldtakeappropriatesteps.Ofcourse,no
growthforaperiodofrecession.
one—Fedormarket—accuratelyanticipatedthe
Fifth,incontrasttothetypicalcyclicalpattern,
economy’sevolutionoverthecourseoftheyear.
butincommonwiththe1990-91recession,market
TheeffectofFedpolicyactionswastosupply
ratesofinterestreachedapeakinadvanceofthe
theeconomywithsignificantamountsofliquidity.
cyclepeak.Historically,marketratesofinterest
FromDecember2000throughAugust2001the
turnwithinamonthortwoofNBERreference
M2measureofthemoneystockgrewatanannu-
peaks.Aheadofthemostrecentcyclepeakin
alizedrateof9.5percent.Duringthesameperiod,
Marchoflastyear,the3-monthTreasurybillrate
anarrowmeasureofthemoneystockknownas
reacheditspeakinearlyNovember2000andthe
MZM,whichincorporatesallcashandassets
10-yeargovernmentbondrateactuallyreached
thatcanbeconvertedtocashquicklyatnocost,
itspeakinJanuary2000,or14monthsbeforethe
grewatanannualizedrateof17.8percent.Thus,
cyclepeak.Usingmonthlyaveragedata,byMarch
monetarypolicywasalreadyquiteexpansionary
2001boththeseratesweredownbyabout175
whenprospectsfortheeconomychangedwith
basispointsfromtheirpeaks.
theattacksofSeptember11.
Sixth,theFOMCactedaggressivelyinadvance
Asnewsoftheattacksarrived,theattention
ofthecyclepeaktoreducetheintendedfederal
oftheFederalReservebecametotallyfocusedon
fundsrate.AttheDecember2000FOMCmeeting,
sustainingthesmoothfunctioningofthepayments
atwhichtimetwomonthsofdataindicating
mechanismandpreventingaliquiditycrisis.The
negativegrowthofindustrialproductionwere
“lender-of-last-resort”functionrosetothefore-
available,theFOMCalteredits“balanceofrisks”
front.Lessonslearnedfrompreviousfinancial
statementfromonewithequalweightontherisk
crises,includingthePennCentraldefault,the
ofinflationandtheriskofslowergrowthtoone
stockmarketcrashof1987,andtheAsiancrisis
indicatingthattheriskwasweightedtoward
andRussiandefaultin1998,providedvaluable
slowereconomicgrowth.Atthattime,themost
recentlyreleaseddataontheunemploymentrate insights.OnthemorningofSeptember11,even
(forNovember2000)hadincreasedonly0.1per- beforetheextentoftheterroristattackswasfully
centfromthecyclelowlevelof3.9percent.On certain,ViceChairmanFergusonannouncedthat
January3,2001,theFOMCloweredtheintended “theFederalReserveSystemisopenandoperating.
federalfundsrateby50basispointsto6.00per- Thediscountwindowisavailabletomeetliquid-
cent.BytheAugust2001FOMCmeeting,250basis ityneeds.”Overthenextseveraldays,about
pointsofadditionalreductionsintheintended $100billionofshort-termliquiditywasinjected
federalfundsratewereimplemented.Overthe throughdiscountwindowlending,openmarket
courseoftheseeightmonths,theintendedrate repos,float,and“swap”agreementswithfour
wasreducedfrom6.50percentto3.50percent. majorforeigncentralbanks.
3
ECONOMICOUTLOOK
Theseactionsweresufficientforthefinancial RECENT ECONOMIC “NEWS”
systemtoweatherthefirstdaysofthecrisisand
Inrecentweeks,asusual,theshort-runout-
continuetofunctionsmoothly.Withinaweek,
lookispushedfirstonewayandthentheother
mostoftheshort-termliquidityinjectionshad
waybythearrivalofeconomicnews.Iwilltake
maturedandtradinginthesecuritiesmarkets
justafewminutestoreviewsomeofthisnews,
hadresumed.
butwanttoemphasizethat,justaseconomists
Immediatelybeforetradingresumedinthe
arenotparticularlygoodatforecastingcyclical
stockmarketonMonday,September17,the
peaks,theyarealsonotparticularlygoodatfore-
FOMCmetbyconferencecallandimplemented
castingthecyclicaltroughsthatmarktheendof
anadditional50basispointreductioninthe
recessions.
intendedfederalfundsrate.Attheregularly
Consensusforecastsatthepresenttimeare
scheduledFOMCmeetingsinOctober,November,
quiteoptimistic.TheBlueChipconsensusfore-
andDecember,additionalreductionsinthe
castreleasedyesterdayprojectsrealgrowthtobe
intendedfundsratewereimplemented,bringing
slightlypositivein2002:Q1,atanannualrateof
thetotalpolicyactionssinceSeptember11to 0.7percent,andthenfortheeconomytoreacha
175basispoints.Ampleliquidityhasbeenpro- growthpathofabout3.5percentinthesecond
videdtotheeconomyasmeasuredbythehigh halfof2002andcontinuingin2003.
growthratesofmonetaryaggregatesfromAugust Datathathavebecomeavailableinthelast
throughtheendoflastyear. severalweeksgivemixedsignals.Onthepositive
side,industrialproductionforNovemberfell0.3
percent,aconsiderablysmallerdeclinethanhad
THE LONGER-RUN ECONOMIC beenexperiencedinSeptemberandOctoberand
OUTLOOK smallerthanhadbeenanticipatedjusttheday
beforethedatawerereleased.BoththeMichigan
Wheredowegofromhere?I’mnotgoingto
ConsumerSentimentIndexandtheConference
offeraspecificforecast,butinsteadwillempha-
BoardConsumerConfidenceIndexincreasedin
sizemyconvictionthattheU.S.economycontains
December,thelatterquitesharply.Personally,I
verypowerfulforcespromotinggrowthandfull
don’tplacemuchweightonthesemeasures
employment.Ourstrengthsincludearesilient
becauseIbelievethatatbesttheircontribution
people,efficientmarkets,andlowinflation.The
asanindicatoroffutureconsumptiondemandis
FederalReservehasmadeclearformanyyears
marginal.Recallthatlatein2000theMichigan
itscommitmenttomaintaininglowinflation.
ConsumerSentimentIndexdroppedsharplyand
Ourcultureandinstitutionsrewardentre- wasthesourceofconsiderablecommentarythat
preneurialactivity.Theyareintact,completely consumptiondemandwouldweakensubstan-
undiminishedbythetragedyofSeptember11. tially.Theweaknessinconsumptiondemand
Peoplearemotivatedbytheintellectualand neverwasrealized.
financialrewardsofbuildingcompaniesand TheDecemberreadingontheManufacturing
servingmarkets.Theywillbelookingforward ReportpublishedbytheInstituteforSupply
foropportunitiestomovetheU.S.economyfor- Management(formerly,thePurchasingManagers
ward.Governmentpoliciesandthestructureof Index)alsocameinmuchstrongerthanexpected
ourlaborandcapitalmarketsenableentrepre- andclosetothelevelconsistentwiththeendof
neurstobesuccessful.Thoseconditionsarein contractioninoutputofthemanufacturingsector.
place,undepreciated.Forthesereasons,allofus HoursworkedperweekduringDecemberinthe
haveeveryreasontobeoptimisticaboutthecourse manufacturingsectorjumpedto40.7from40.3
oftheU.S.economyintheyearsahead. inNovember.
4
WhatIsHappeningintheU.S.Economy?
Inrecentweeks,pricesofcomputerchips carryinganumbrellatoSeattleonthedetailsof
havestabilizedandevenrisensomewhat.At theweatherforecast,whyshouldIspendmuch
thatsametime,ordersforchipshaveincreased. timetryingtoguesswhethertherainfallwillbe
Thismaysignalthatthesharpcontractioninthe 0.1or0.5inches?
computersegmentofthe“high-tech”sectoris Therightwaytolookatmonetarypolicy,in
comingtoanend.Thereareevensomesignsof myview,isthattheprimaryresponsibilityofthe
stabilizationinthebeleagueredtelecomindustry. centralbankistomaintainthepurchasingpower
EarlierthisweekCorningannouncedthatitwill ofthecurrency—tobesuccessfulinapolicyof
resumeproductionatfourplantsthatwereidled maintaininglowandstableinflation.While
forthreemonthsbecauseofexcessinventoriesof achievingthatprimaryresponsibility,theFed
fiber. hasagreatdealofroomtomakepolicyadjust-
Ontheotherhand,incominginformation mentstohelpstabilizeemploymentandoutput.
continuestosignalweaknessinlabormarkets. Asshort-runconditionschange,ofteninunpre-
InDecember,accordingtothedatareleasedat dictableways,wedoourbesttoadjustthetarget
theendoflastweek,theunemploymentrate federalfundsrateinthedirectionconduciveto
increasedto5.8percent.Nonfarmpayrollemploy- maintainingeconomicequilibrium.Allweneed
mentdecreasedby124,000workers,withemploy- isageneralsenseofwheretheeconomyisgoing
mentinthemanufacturingsectordecreasingby andawillingnesstoactdecisivelywhensome-
thinghappensthatcallsforsucharesponse.We
133,000workers.Thesesignalsfromlabormar-
didnotpredicttheterroristattacks,butwedid
ketsarenotnecessarilyinconflictwiththeother
actdecisivelywhenconfrontedbythem.The
incomeandproductiondata,sincehistorically
marketsunderstandthatwewillactdecisively
theunemploymentratehasbeenalaggingindi-
whenrequired,andthatunderstandingyields
catorthatcontinuestoriseaftertheeconomyhas
bettermarketresults.
startedtorecover.
Letmereiterate:Whatisimportantaboutthe
Icouldgooninthisveinfortherestofthe
strategyofmonetarypolicyisnotthattheFedhas
morning—indeed,forlongafterallofyouhad
asuperbcrystalball,whichitdoesn’t,butthat
walkedaway.Insummary,itistooearlytopick
itslong-rungoalsareclearandthatitisreadyto
aprecisedatefortherecessiontrough,butthere
actwhenrequired.TheFedisalsoreadytodo
isabottomingoutfeeltothedata.
nothing,whenrequired.Mydetailedparsingof
thedata—andI’vedonealittleofthatthismorn-
ing—isnotforthepurposeofcomingupwitha
FORECASTS AND FED POLICY
betterforecastbutrathertomakesurethatthere
I’mgoingtofinishwithafewcommentson isnotsomethingimportantgoingonthatfore-
therelevanceoftheeconomicforecastforFed castersingeneralaremissing.
policy.Considerthisanalogy:Youaretraveling GivenallthedataI’vestudied,Idon’tthink
toSeattlethedayaftertomorrowformeetingson thereisanymysterytothecurrentsituation.The
MondayandTuesday.Youhavegonetoseveral patientisrecoveringfromrecessioninthenormal
websitesanddiscoveredthatweatherforecast- way.Wehaveaprettygoodideawhatisgoing
ersarepredictingrainforthetwodaysofabout on;ourdiagnostictestsarecomingupnegative.
halfaninch.Youaskmeformyexpertopinion Youcanwalkoutoftheeconomicdoctor’soffice
andItellyouthatIexpect0.1inchofrain—just thismorningstillknowingthatyoudon’tfeel
alittledrizzleforashorttime.Doyouleaveyour justright,butthatnothingseriousiswrongwith
umbrellahome?Idon’tthinkso. youlookingouttotheyearsahead.IknowthatI
Thefactisthatweatherforecastsandeco- amreassuredwhenIwalkoutofaphysician’s
nomicforecastshaveaconsiderablerangeof officewiththatmessage;Ihopeyouarereassured
error.Ifitmakesnosensetobasemybehaviorin thismorningwithregardtotheeconomy.
5
Cite this document
APA
William Poole (2002, January 10). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20020111_poole
BibTeX
@misc{wtfs_speech_20020111_poole,
author = {William Poole},
title = {Speech},
year = {2002},
month = {Jan},
howpublished = {Speeches, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/speech_20020111_poole},
note = {Retrieved via When the Fed Speaks corpus}
}