Economy Poised for Recovery
September 24, 2001
Last week's massive drop in the stock market led many analysts to believe we are now in an official recession. A recession is defined, informally but not officially, as two consecutive quarters of negative real (inflation-adjusted) growth in the gross domestic product.
As horrific as the loss of life and property were in the World Trade Center and Pentagon attacks, the purely economic loss was minimal in a $10 trillion economy.
- Adjusted for inflation, the physical loss was less than that of Hurricane Andrew in August 1992 see figure.
- And it is almost identical to the loss of the Northridge, California earthquake in January 1994.
- The total loss may be higher, due to impact on future output, but as a share of GDP these disasters are comparable.
A recession may be avoided because of private sector and government actions. The Federal Reserve is easing monetary policy very aggressively. And the federal government will add a significant amount of fiscal stimulus in coming months, including $40 billion in new spending for relief and defense. In addition, it is very likely that there will be a cut in the capital gains tax and other stimulus as well. Finally, business investment is going to pick up, as businesses buy new equipment and make other investments to cope with the new terrorist threat.
The economy has already fallen sharply for about 20 months. It is poised to recover and the monetary and fiscal ease that is occurring will only accelerate that trend.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 24, 2001; "Bouncing Back from Terror," New York Post, September 22, 2001.
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