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Saturday, October 08, 2005

Are Recessions in Recession?

The more articles I read like this, the more I start to feel like we are becoming overconfident in our ability to control cyclical swings in the economy.  It's a worry others have as well:

Have Recessions Absolutely, Positively Become Less Painful?, by David Leonhardt, NY Times: The ... United States has endured an almost biblical series of calamities in recent years - wars, hurricanes, financial scandals, soaring oil prices and rising interest rates - but the economy keeps chugging along at an annual growth rate of roughly 3 percent. It has been able to do so with the help of technology that allows businesses to react ever more quickly to changes. But with little notice, those reactions have also created a new feature of the business cycle: the micro-recession. When one of them strikes, activity slows for a few weeks, sometimes in just certain sectors or regions, as companies adjust to a dip in demand. It has happened much more often in the last few years than in earlier expansions, but growth has picked up each time, thanks in part to the adjustments that businesses have made. No company embodies this change, for better and worse, quite like FedEx. When Alan Greenspan, the Federal Reserve chairman, sees Frederick W. Smith, FedEx's chief executive, during halftime of Washington Redskins games, Mr. Greenspan uses the company's vast reach to check in on the economy. "He always asks, 'We still O.K.?' " said Mr. Smith, a part-owner of the team whose stadium suite abuts the one Mr. Greenspan uses. More formally, Federal Reserve staff members rely on FedEx and the nearly six million packages it delivers every day for real-time data that helps set interest rate policy. ... The business cycle has certainly not been eliminated, as some dreamers suggested during the 1990's boom, but recessions really do seem to happen less often. ... Across the economy, quick reactions, like asking workers to put in more hours one week and fewer the next, have helped lead to the business cycle's new hiccups... At FedEx, the first responders to the business cycle are a group of managers who gather for a worldwide conference call every morning at 8:30 Memphis time. Sitting at a faux-wooden conference table in a spare room, beneath a screen that shows every FedEx plane in the air, they review the last 24 hours of activity. ... Changes like this ... have helped foster the recent economic stability. The amount of inventory that companies keep in their warehouses, in case demand suddenly surges or some boxes become stuck in Oakland, has steadily fallen...

This doesn't fully explain the change in the frequency and duration of business cycles, and a business cycle cannot be detected by "first responders" based upon the past 24 hours worth of FedEx data.  There is a step missing here. The article is a story about very short-run variations in output and how companies such as FedEx smooth such fluctuations on a daily or weekly basis, but that does not necessarily change the duration of business cycles.  With apologies for the quality of the artwork, here are two possible paths for output through time, one that wiggles a lot and has lots of  "micro-recessions" and one that doesn't have any due to innovations such as inventory management changes described in the article:

Eliminating high frequency variation in output is certainly desirable and does stabilize the economy in the very short-run, but, though it is certainly possible to construct models with this property, it is not necessarily the case that eliminating "micro-recessions" also eliminates "macro-recessions."  A step connecting the two needs to be provided. For example, better inventory management may smooth very short-run cycles, but be unconnected to business cycle frequency variation in output brought about by wage and price rigidities. 

There does seem to be increased stability in the last twenty years, but I'm not predicting the end of recessions forever and ever just yet.  And with all the evidence that came out during the Social Security debate on the increased economic risk that households have faced over the last thirty years, it is not clear that increased stability at the macroeconomic level translates into an increase in welfare for individual households.

    Posted by on Saturday, October 8, 2005 at 12:51 AM in Economics, Policy | Permalink  TrackBack (1)  Comments (8)

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    Mark Thoma is, I think rightly, sceptical of this:The economy keeps chugging along at an annual growth rate of roughly 3 percent. It has been able to do so with the help of technology that allows businesses to react ever [Read More]

    Tracked on Sunday, October 09, 2005 at 05:14 AM


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