United States Recession of 2001-2002

¶ … United States Recession of 2001-2002

The recession that began in March 2001 officially ended in November of that year. Patterns of recession start with increasing interest rates by the Federal Reserve Open Committee, are proceeded by growth slowdowns, continue with the fall of real output, and eventually lead to the rise in unemployment. Recessions have been noted to last for an average of between 8 to 11 months. It is also noted that around the time when the Federal Reserve raised interest rates during 1999 and 2000, the economy noticed a slowdown. Several other factors have contributed to the 2001-2002 recession. Factors such as the erosion of consumer confidence, rising energy prices, and stock market instability, as well as the effects of the terrorist attacks of September 11th 2001, and technological change and productivity can also be viewed when discussing the causes that led to the recession.

However, it took the Business Cycle Dating Committee 20 months to conclude that the recession was over (Tieman, 2001). From March to November 2001, employment dropped by almost 1.7 million. The reasons why the United States economy failed to undergo a recovery were not the result of a fall in consumption spending but was set off by a downturn in business investment in the wake of the collapse of the share market bubble and the inflated profit expectations of the late 1990s.

Furthermore, by the month of October 2001, a noticeable fall in employment had occurred. Figures supporting this unemployment rate showed a rise from 4.9% in September to 5.4% in October. The figures released in October were the first to show the effects of the terrorist attacks of September 11, 2001. This rate of unemployment was the biggest 1-month rise in 21 years, as well as the highest rate since December 1996, reported by the Labor Department (Tieman, 2001). These job losses in October were felt across most industry groups, with noticeably larger declines in the manufacturing and services sector. Figures from the Labor Department showed 111,000 job losses to the service industry, while the manufacturing sector saw employment fall by 142,000. This marked the fifteenth consecutive month of factory job losses.

In a "normal" recession, recovery begins as cuts in interest rates that induce increased consumption spending. This, in turn, leads to increased production to meet demand and eventually to increased capital spending. However, in the recession of 2001-2002, consumption spending did not fall because it was sustained by the cuts in interest rates carried out by the Federal Reserve Board over the previous 2 years. The only real basis for a recovery is an increase in business capital spending and it is here that some of the intractable problems of the United States economy are most clearly seen. Interest rate cuts have little or no impact here because the major problem confronting business is not lack of credit but lack of profitable opportunities.

Pre-tax profits as a share of business product for the non-financial corporate sector rose to 8.7% in the first quarter of 2003 against the low of 7.2% in the first quarter of 2001. This rise, however, was still well below the peak of 12.8% reached in the third quarter of 1997 and almost 1.5% below the post-1970 10.1% average (Tieman, 2001). The economic problems generated by lower profit rates are compounded by the fact that lower interest rates and higher budget deficits, both of which tend to stimulate economic growth, are having increasingly less impact.