The 2001 Recession is a Bad Example

Our suggestion that there were a few promising economic signs drew a number of comments about the 2001 recession.  Some note that the market continued to decline for many months and another 40% after the “official” end of the recession in November of 2001.  The implication is that the same might or will occur this time.  This is both poor reasoning and a bad example. Only One Example?It is poor reasoning because circumstances are always a bit different.  Why expect this recovery to be the same as the 2002-03 period rather than some other time?  The ECRI work that we cited, now helpfully posted in more detail at The Big Picture, sees the recovery as fitting many past patterns.  There are not that many recessions and recoveries to use.  It is better to use as much relevant  data as possible.

2001 Was Atypical

There are two important reasons why the 2001 -03 era was atypical.  Perhaps because the leading economics bloggers were less active during this time, none of them seem to have noted these facts.

  1. 2000 was an unprecedented peak in labor participation.  Between the Y2K problems and the Internet startups there was tremendous demand for specialized workers.  Even the COBOL programmers were pulled back into the market.  Many companies chose to dodge the problem by buying new computers.  This pulled demand forward and further increased employment.  We will probably never again see such a peak in labor force participation.
  2. After 9/11 it was clear that the US was going to engage in war with Iran.  There was a prolonged dance with the UN while we tried to build a coalition.  It was a time of uncertainty.  In reaction to this uncertainty, US companies delayed expansion and hiring.  It was an easy choice.  Why act when you could wait a few months and see how it would turn out?  We watched this over and over in CEO interviews.

The result was that demand and hiring was pulled forward to 2000, creating an impossible high.  When the recovery came, it was distorted by the altered computer cycle and also the delay for the start of the war.

This was an easy target for Democrats in 2004, so we got the term “jobless recovery.”

2009 Is Different

Most obviously, the 2009-10 recovery will not operate from a prior peak in labor force participation.  There is plenty of room to get back to old levels.  Also, there has been no pull forward in demand.

Just as importantly, there is unprecedented monetary and fiscal stimulus, just starting to hit.  This is an important and significant difference.

Our Take

No one knows exactly how this will play out.  We have maintained that it is a challenge for any existing models, including the ECRI’s, for which we have the most respect.  Quite frankly, we wonder if the ECRI model will accurately reflect the stimulus impact.

While employment always lags as companies squeeze more work out of an existing force, there is much more potential for a rebound.  There is no a priori reason to expect a jobless recovery.

Meanwhile, corporate earnings from lean companies continue to surprise.


Originally published at A Dash of Insight and reproduced here with the author’s permission.

5 Responses to "The 2001 Recession is a Bad Example"

  1. Guest   July 22, 2009 at 3:01 pm

    Logically reasoned and well said.Thank you.

  2. Owen B   July 22, 2009 at 7:21 pm

    Agree with your basic points, but would add a few comments:1. I’ve heard ECRI say that they don’t use any models in the common sense of the word, i.e., no econometric models that are “fitted.” This is a stark difference from most forecasters:http://www.ritholtz.com/blog/2009/07/synchronized-surge-strengthens-since-april/#comment-1960752. ECRI Long Leading Indicator peaked in early 2002, ahead of the subsequent decline in stock prices later that year:http://www.ritholtz.com/blog/2009/07/synchronized-surge-strengthens-since-april/#comment-1949713. ECRI recently said that most of the initial stimulus spending has yet to hit, so that it would be a reinforcement of the upturn in out quarters, but it not a key part of why they’re saying recovery starts this summer:http://www.reuters.com/article/economicNews/idUSN1740071220090717

  3. George Harter   July 24, 2009 at 2:32 am

    Where will all this mythical employment come from that will avert a JOBLESS RECOVERY? Logically speaking then, when job levels AND INCOMES are much lower as a result from where does consumer spending arise?Replacing $18/hr jobs with $7/hr jobs may be considered recovery to the elite-WHO ARE YOU KIDDING? There won’t be any GIANT consumer push to start buying CHINESE goods, your retail volume will have shrunk with a number of fewer purveyors.Retail IS our economy now,it WON’T BE THERE!!!!PS You believe the stimulus will continue??? It is only PORK-you are aware of that(you SHOULD BE). PORK DOESN’T BUILD ANYTHING EXCEPT HIGHWAYS TO NOWHERE. You people are fools. Two faced especially, if you often argue that the NEW DEAL did no good. You are dishonest enough to claim that Obama PORK will be different???You Boys say Hi to Larry when next you see him!George HarterBaghdadontheHudson

  4. Paul   July 24, 2009 at 2:51 am

    How will US households, a significant proportion of which have negative equity in their homes, un- or under- employment (and cannot increase their debt because of that negative or reduced equity or reduced earnings situation) create the demand that was fed by increasing debt during the 2003 to 2007 period?How can the government sector which is about 1/3 the size of the private sector make up for a 16% fall in demand as private debt stops growing?

  5. Guest6   July 25, 2009 at 1:26 pm

    Confusing Irak with Iran is a Bad Mistake