For release: Sept. 4, 2003

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The 2001 Recession: Why Was It Different?

ST. LOUIS, Mo. — Forecasters were caught off guard when the economy headed into a recession during 2001, but this downturn was marked by some unusual features that were not necessarily related to the events of September 11, according to an economist at the Federal Reserve Bank of St. Louis.

The economist is Kevin L. Kliesen. His comments appear in the September/October issue of Review, the St. Louis Fed's bimonthly journal of business and economic issues.

In June of 2001, three months after the start of the recession, as determined by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee, less than 10 percent of the economic forecasters thought the U.S. economy had entered into a recession. And by September 10, only 13 percent thought the country had entered a downturn. By September 19, however, a poll indicated that more than 80 percent of forecasters thought the United States had slipped into a recession.

Why the disconnect? "One of the reasons for the disparity is that real-time data
showed that real GDP growth remained positive throughout the first half of 2001," said Kliesen.

Kliesen said forecasters were also surprised by the slowing in business and residential investment, and the sharp declines in real net exports in mid-2000. "These relatively large forecast errors suggest that the shock that tipped the economy into a recession began in these sectors," he said.

Kliesen cited several other unusual features of the 2001 recession:
• The decline in employment was well below average and the employment rate rose by less than normal.
• Growth of real consumer disposable income was stronger than normal ? a by-product of stronger-than-average growth of labor productivity ? as was consumer spending. "One of the positive fallouts from 9/11 was the introduction of sales incentives by several automotive manufacturers, which helped to boost car and truck sales tremendously," said Kliesen.
• Stock prices continued to fall during the recession, rather than rallying as usual before the end of the downturn, which helped to depress business investment.
• Businesses cut inventories by the largest amount relative to any other post-World War II recession.
• Exports fell by much larger than normal.

In addition, Kliesen said that forecasters were surprised by the strength of labor productivity throughout 2000 and 2001. "The stronger-than-expected growth in labor productivity helped to minimize growth of unit labor costs, which helps profit margins and helps to tamp down aggregate inflation pressures," he said.

"Post-World War II data," said Kliesen, "suggest that long economic expansions tend to be followed by recessions that are shorter than average and have smaller-than-average declines in real GDP and employment."

So what lessons can forecasters and policymakers draw from this? Kliesen noted two:
(1) Revisions matter a great deal, because economic history is constantly being re-written. "For example, after the annual revisions to GDP in July of 2001, it was revealed that, as the NBER suspected, the economy had actually been contracting since March of 2001," said Kliesen.
(2) The NBER seems wise to focus on key monthly variables such as employment and industrial production, which, Kliesen noted, portrayed a different view of the economy's strength than the GDP numbers in 2001.

"Overall," Kliesen concluded, "the U.S. economy was far more resilient than was expected,
despite the jarring developments that preceded it ? the boom and bust in the stock market, and the boom and bust in business investment."

Review is also available on the St. Louis Fed's web site: http://www.stlouisfed.org.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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