The Growing Likelihood Of A Recession
December 11, 2000
A growing list of economic indicators is pointing toward a downturn next year. Consider the following:
- The stock market is in virtual free-fall, with the tech-heavy NASDAQ market down almost 50 percent from its March peak, resulting in the disappearance of about $3 trillion of wealth.
- Analysts are forecasting weak Christmas sales this year, which could spell the end for many Internet retail sites.
- Many credit market observers see signs of a credit crunch and the default risk on corporate bonds has increased -- as shown by the increase in the interest rate spread between Treasury securities and high-grade corporate bonds of 70 basis points (7/10s of a percentage point) since January 2000.
- Real gross domestic product growth has plunged from an 8.3 percent growth rate a year ago to just 2.4 percent in the third quarter of this year.
- Unemployment is rising as initial claims for benefits, a leading indicator, have risen for six weeks in a row to 358,000, due to increasing high tech company layoffs.
Historically, economists have looked at two economic policy instruments to forestall and mitigate recessions. First is an easier monetary policy, which is controlled solely by the Federal Reserve. Second is an expansive fiscal policy, such as a tax cut. A tax cut now could well head off an economic downturn next year, by improving incentives and consumer confidence.
The odds of a recession are increasing the longer there is no resolution to the election, and the longer Bush is prevented from organizing his administration and taking preventative action. If one occurs on his watch next year, however, the blame will not be his, but mainly that of Clinton and Gore.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 11, 2000.
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