Early 2000s recession

The Event: Economic recession in the United States that ended the era of unprecedented expansion that began in the early 1990s

Date: March to November 2001

The United States suffered an economic recession lasting from March 2001 to November 2001. The downturn—during which the gross domestic product declined 0.3 percent and unemployment rose to 6.3 percent—has been attributed to several events, including the bursting of the dot-com bubble in 2000, the terrorist attacks of September 11, 2001, and a series of accounting scandals that came to light in the early part of the decade.

Ideally, a recession occurs when gross domestic product (GDP) growth is negative for two or more consecutive quarters (a quarter lasts approximately three months). Recessions are regular events in an economic cycle that also includes expansion, boom, and contraction, though some are worse than others for a number of reasons. The nonpartisan National Bureau of Economic Research (NBER) declares a recession or, more accurately, confirms when one is occurring.

According to the NBER, the United States experienced an unprecedented economic expansion from March 1991 to March 2001. The latter date marks the beginning of the early 2000s recession, which lasted for eight months at the beginning of President George W. Bush’s first term. The NBER measures monthly rather than quarterly data, in conflict with the “real” definition of a recession, which stipulates negative GDP growth for two or more quarters. This is important to note because there was some controversy about which president (the outgoing Democrat Bill Clinton or the incoming Republican Bush) should take the blame for the recession. Many Republicans referred to the early 2000s recession as the “Clinton Recession.” This argument was fueled by a 2004 report by the Council of Economic Advisors (CEA), which stated that the recession began several months before the March 2001 date originally reported by the NBER, and, thus, at the end of President Clinton’s second term. The blame game continued for some years, though even if the recession did begin under President Bush’s watch, it would be inaccurate to say that he caused it with his policies because he had only been in office for two months when it started. The larger issue was that the CEA, a government agency, usurped the authority of the nonprofit, nonpartisan NBER, to whom other administrations had deferred historically. The CEA’s report proved to be beneficial to President Bush, who, by this time, was running for reelection.

Michael Feldstein, president of the NBER, expounded on how he determined the start date of the early 2000s recession (and the end of expansion) in an article for the Boston Globe written a month after the recession’s low point on December 4, 2001. (To clarify, the end of the recession was not determined by the NBER until 2003.) Feldstein noted that the rise and fall of production, sales, employment, and income usually happens in a parallel fashion, and that the end of the economic expansion in 2001 would have been easy to pinpoint if this had been the case (which it had not). According to Feldstein, industrial production peaked in September 2000 around the same time as sales in manufacturing and retail. The NBER based the start date of the recession on employment, which peaked during the first quarter of 2001, in March. Feldstein notes that the GDP did not turn down until the third quarter of 2001.

Contributing Factors

While several of the major events to which the recession is attributed—the collapse of the dot-com bubble, the September 11 terrorist attacks, and the accounting scandals at Enron and WorldCom—could not have been predicted, economists had been anticipating an economic downturn during the boom of the 1990s, which boasted both low inflation and low unemployment. One contributing factor to the recession seemed almost counterintuitive. Deflation, or a steady drop in consumer prices, brought on by a government surplus coming out of the Clinton years was associated with slow economic growth. Recession.org attributes this point to the economistJohn Maynard Keynes, the father of Keynesian economics. Keynes suggested that deflation brought on by a budget surplus begets slow growth because the government is “hoarding” a large amount of money. (The same reasoning applies when consumers, during a recession, save more than they spend.) Ben Bernanke, the chairman of the Federal Reserve during the Obama administration, addressed the National Economics Club in November 2002 on the dangers of deflation, a cause, he argued, that contributed to Japan’s economic slump in the 1990s. Deflation also brings down consumer demand; if prices fall at a steady rate, consumers will put off making purchases as they wait for even lower prices, which slows both growth and, during a recession, recovery.

Another factor in the recession was the hysteria surrounding Y2K, or the Year 2000. Culturally, there was much ado about the new millennium, but in the business world, companies were seriously worried that their technologies might not be able to weather what many believed would be a widespread Y2K bug. The problem, they postulated, was that older computers would break down when the date changed from 99 to 00 because the computers, many believed, would miscalculate the date as the year 1900, possibly placing a century’s worth of data at risk. (In truth, no one really knew what would happen or how much information would be lost in the event of a crash.) To prepare for this purely hypothetical, and in the end nonexistent, threat, companies and consumers rushed to replace their old technologies. Of course, after the uneventful date passed, the cash flow that had flooded the technology sector in 1998 and 1999 dried up. Most companies were already “up to speed,” so there was little demand for new technology products.

The Y2K scare was tied to a large catalyst for the early 2000s recession: an overvaluation of stock in tech and Internet companies. As more money was spent on new computers and computer software, stock prices for tech companies rose and investors scrambled to get in on the action. Thus, the dot-com bubble was born. People invested in companies that were not turning a profit, and brokers who should have known better were encouraging them to cash in on what was increasingly becoming a gold rush. Warren Buffett, the chairman and CEO of Berkshire Hathaway, who many consider to be among the most successful investors in history, predicted the outcome of the tech boom but was widely ridiculed for his stance. Supporters of the boom argued that the (ultimately faulty) business models of the new tech companies were indicative of a “new economy.” According to a 2001 article (titled “Warren Buffett: ‘I Told You So’”) from the BBC News, Buffett thought that many investors harbored unrealistic expectations for the future success of the tech market based on the enormous amount of money many made during the late 1990s.

Despite the warning signs, the tech bubble effectively burst on March 10, 2000, when the NASDAQ hit an all-time high of 5,048.62 points (the intraday trading number is slightly higher) more than double its value from the year before. After that day, the market began a downhill slide and many new tech companies closed for good.

With the tech industry still in decline throughout 2001, the terrorist attacks on September 11dealt a startling short-term blow to the economy. In the immediate aftermath of the tragedy, according to a 2002 congressional report titled “The Economic Effects of 9/11: A Retrospective Assessment,” it was widely believed that the attacks pushed the already weak economy into a recession, but the report argues that this is not the case. However, the Dow Jones Industrial Average suffered its largest one-day point loss (685 points, or 7.1 percent) when it reopened on Monday, September 17. (This loss was surpassed on September 29, 2008, heralding the second recession of the decade, when the Dow Jones suffered a loss of 778 points, or 7 percent.) Damages from the attack to the financial district in New York City also contributed to a detrimental effect on the economy.

In October 2001, news broke that the Enron Corporation, an American energy company, had been lying about its massive profits. One of the largest and most politically influential companies in the United States, Enron declared bankruptcy in the wake of its multilayered scandal. Similar accounting scandals followed in 2002: Telecommunicationsgiant WorldCom submitted what was then the largest bankruptcy filing in US history; Tyco International’s executives were accused of stealing $150 million from the securities company; and Global Crossing, a telecommunication and computer networking company with questionable bookkeeping practices, collapsed early in the year. The unprecedented scandals made investors more cautious, even suspicious, and they withdrew from the stock market in droves. According to George A. Akerlof and Robert J. Shiller, authors of the book Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (2009), many found faith in the housing markets where they need not trust accountants.

Impact

In 2003, the NBER’s Business Cycle Dating Committee released a report stating that the economy reached its trough in November 2001. In economic terms, a trough marks the end of a decline in growth, though the committee said that economic conditions in 2002 and 2003 remained unfavorable. Many people refer to the early 2000s recession as the “2001 recession,” but describing it as the “2001–2003 recession” would be more accurate because of its long-lasting effects on unemployment. For example, the unemployment rate peaked at 6 percent in 2003. According to the Economic Policy Institute (EPI), the 2001 recession was followed by extended job loss which increased rates of long-term unemployment. The EPI’s brief, “The Rising Stakes of Job Loss” (2005), compared the 1990 recession and the early 2000s recession. The brief determined that following all other post-World War II recessions, it took the economy an average of twenty-one months to recover the jobs lost in the downturn. In the 1990 recession, it took the economy thirty-one months to “reclaim peak employment” levels, and in the 2001 recession, it took forty-six months.

The data points to a historically weak recovery, though the recession itself was relatively mild. In fact, it was surprising just how mild it ultimately was given the incredible length of the expansion that preceded it. However, in the wake of the recession, the term jobless recovery—coined during the 1990 recession—applied, and it gave rise to concerns that recovery from the two consecutive recessions was indicative of a larger trend. Indeed, a similar picture emerged after the 2008 recession.

In hindsight, many Americans believed that President Bush’s tax cuts of 2001, 2002, and 2003 helped stimulate the economy out of the recession because they preceded the recovery. According to the Tax Policy Center, this is not the case. The center attributes the economic turnaround to several factors. By October 2001, the Federal Reserve had cut interest rates to a forty-year low. The rates caused a number of homeowner’s to refinance their mortgages, and paying a lower monthly rate on their home, consumers were able to spend more on other goods. Government spending also increased as the United States began its military campaign in Iraq and, after the tech industry bottomed out following the collapse of the dot-com bubble, investors returned to tech companies in 2003.

Bibliography

Akerlof, George A., and Robert J. Shiller. Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism. Princeton: Princeton UP, 2009. Print. Argues that economists often overlook human emotion and behavior in their calculations.

Feldstein, Martin, and Kathleen Feldstein. “From Recession to Recovery.” Boston Globe. New York Times Co., 4 Dec. 2001. Web. 27 Nov. 2012. Explains the factors that contributed to the NBER’s decision to label the 2001 economic downturn a recession. Discusses the possible duration of the recession.

Lowenstein, Roger. Origins of the Crash: The Great Bubble and Its Undoing. New York: Penguin, 2004. Print. Traces the events leading up to the stock market crash of the early 2000s to the 1970s.

Martel, Jennifer L., and David S. Langdon. “The Job Market in 2000: Slowing Down as the Year Ended.” Monthly Labor Review Feb. 2001: 3–30. Print. Compiled by the Bureau of Labor Statistics. Report looks at the slowing of the economic expansion that lasted from 1990 to the end of 2000.