The missing recession

While the Australian and American economies have moved in virtual lockstep for the past three decades, recent commentary suggests a sudden break. The Economist magazine rhapsodises about the merits of an economy they now call "Down Wonder", while gloom about the US economy reached a crescendo when the events of September 11 further deflated an economy suffering from the bursting of the dot-com bubble. Should the United States now be looking to Australia for lessons on how to run a successful economy?

In a stark reversal of national traditions, Australian hubris about our economic prospects is in contrast with American hand wringing. Why this sudden divergence in the economic outlook?

One likely explanation is that while our economic rhetoric may be out of step with the Americans, our economic reality is not. American pessimism over the recession is overwrought, while closer to home complacency threatens.

Indeed, the similarities between the Australian and United States economies are more striking than the differences. Both economies have had a similar record of mild inflation over recent years. Both have also seen unemployment rise sharply. In the US unemployment has risen 1-3/4 percentage points since its trough, while local unemployment appears to have peaked 1 percentage point above earlier levels.

What then is the source of Australian hubris? Federal Treasurer Peter Costello boasts triumphantly that our current output growth of four per cent is the highest among the world’s leading economies. But this compares us with a pretty miserable lot: Europe remains sluggish, and Japan is fighting a decade-long depression. (After a decade of outperforming the Kiwis, comparison with New Zealand is barely even worth noting.) Perhaps a better marker is our own history, and on this scorecard, current growth rates are barely above our long-run average of 3.75 per cent.

But despite this, it is our performance relative to the United States that has drawn the most attention. Even on this score Australian triumphalism appears premature; an increasingly influential view suggests that the US economy is not doing too badly after all.

The National Bureau of Economic Research, the semi-official scorekeeper of the business cycle, declared that the United States entered recession in March 2001. Their determination on when or if the recession has ended will not be made for several months. However many are prepared to pre-empt their decision. At its most recent meeting the Federal Open Market Committee of the Federal Reserve Board declared the US economy to be "expanding at a significant pace".

Recent numbers provide support for this view. While the US economy took a backward step in the third quarter of 2001, it appears to have resumed a healthy forward momentum, growing at an annual rate of 1.7 per cent in the final quarter of 2001, despite the sharp shock to consumer confidence following the terrorist attacks. Latest numbers suggest that it is probably growing even faster today.

US Treasury Secretary Paul O’Neill is prepared to go a step further, arguing that "it seems quite clear now that our economy never suffered a recession". In support of this attempt to define away the recession, Dr Randy Krozner, a member of Bush’s Council of Economic Advisors, noted, "some people use two quarters of negative growth. We haven't had that".

Latest forecasts suggest that US real output will grow by around 2.5 per cent in 2002, and 3.5 per cent in 2003.

Yet if it is business as usual in the United States, someone forgot to tell the employers. John Sweeney, head of the AFL-CIO, the peak union body in the US, captured the mood of his members nicely, noting, "the much anticipated economic upturn continues to elude millions of workers." While output growth is continuing at a healthy pace, the US economy has shed over 400,000 jobs over the past year, and several pundits suggest that the unemployment queues will keep growing.

Taking these numbers together, it appears that the US has suffered a fairly unusual type of recession. Why has this downturn been so short, and why does the labour market look so ill, while the output numbers look reasonably healthy?