Smaller Ups, Smaller Downs
Subject Recession
Topic Fiscal Policy
Key Words Recession, Economic Growth, Unemployment
News Story

Even though available data indicate that we are in the midst of a recession, economic analysts are speculating as to what will follow. In the 1950s through the 1980s, recessions were followed by booms with economic growth often reaching 8 percent after the recession's trough. Many economists believe that the current recession will be short and mild with economic growth limited to 3 percent. Forecasts of limited growth are based upon a number of changes that have taken place in the economy that have moderated economic volatility.

From the end of World War II to March 1991, the U.S. economy had 9 recessions, not counting the present one, an average of about 2 per decade. At the bottom of the downturn, economic activity was typically off by 5 percent. Economic expansion following each of the downturns tended to be robust, with employment increases averaging 7 percent through the 1970s. The last recession, from July 1990 to March 1991, lasted less than a year with economic growth falling only 3 percent followed by a slow recovery. Economists are starting to believe that reduced economic volatility, that is, slower expansions and milder recessions, may have become the norm because of a number of fundamental changes that have taken place in the economy.

A major change is the increased importance of the service sector. Because consumers typically postpone purchases of washing machines and cars during a recession but not services such as haircuts or education, the service sector is considered to be less prone to volatile swings compared to manufacturing. Currently, service sector employment amounts to 80 percent of all jobs, compared with 60 percent in the 1960s. Another important factor is the impact of technology. Technological advances have reduced the need for inventories, reducing the sharp increases and decreases in production that followed changes in consumer spending. The final consideration is the Federal Reserve. Many economists believe that the Fed has become more adept at controlling the economy, thereby producing smaller recessions and more evenly balanced recoveries.

(Updated January 15, 2002)

1. Why are consumer services considered to be less vulnerable to changes in the economy?
2. What are the phases of the business cycle? What typically happens to output, employment, unemployment, wages and prices during these phases?
3. The author believes that recessions have become less frequent and recoveries steadier but less robust. What arguments does he offer to support this contention?
Source David Leonhardt, "Recession, Then a Boom? Maybe Not This Time," The York Times, December 30, 2001.

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