NCPA - National Center for Policy Analysis

Specter of Depression Haunts Economists

May 29, 2003

With rising unemployment and falling prices for goods and services both here and abroad, some economists are whispering the "d" word -- depression. Most, however, are forecasting economic growth this year, and the nation has far more financial safeguards than it did in the 1930s. But even the remote possibility of depression sends shivers up and down the financial markets.

Some of the factors pushing prices down:

  • Consumer spending has kept the economy afloat, but it's growing at half the rate it did in the 1990s, says Stephen Roach, chief U.S. economist at Morgan Stanley.
  • Personal bankruptcies rose to 1.5 million during the 12 months ended March 31, a record, and consumers normally ratchet down spending when unemployment has been rising -- as it has been this year.
  • Companies invested too much in new plants and equipment in the 1990s -- U.S. manufacturers are operating at just 72.5 percent of capacity now, down from 82.4 percent in 2000.
  • Too much capacity usually augurs price-cutting: "It's a breeding ground for pressures on pricing," Roach says.
  • Countries such as China can produce goods much more cheaply than the USA can, and some companies are shifting information workers, such as software designers and even stock analysts, to low-cost countries such as India.

Another worry: Deflationary pressures in Japan and Germany could drag the United States down with them. Japan has been in a deflationary recession for a decade, and the International Monetary Fund says the likelihood of mild deflation in Germany is high. "Germany is starting to look a lot like Japan," says John Lonski, chief economist for Moody's Investor Services.

Source: John Waggoner and Adam Shell, "As economic fears creep higher, dreaded 'D' word lurks in wings," USA Today, May 27, 2003.

For text

http://www.usatoday.com/money/economy/2003-05-27-depression-cover_x.htm

 

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