SINTRA 0 AVRTETOREDND UIC ANT Economic activity, such as production or employment, does not proceed in a review © Good economic news continuous, smooth manner. Typically, there are upturns invariably followed by seemed to be frequent downturns, The upswings and downswings in the general level of economic activity in March 1992, | are termed business cycles. Over the long term, the increases in economic activity 4 These signs seemed] to have been greater than decreases, so that the American economy has grown consid- signal the end of 1 > months of recessio erably. @ Many economists and Business cycles seem to be an inexorable part of the capitalist system. In the ioe had | thought that a post-World War Il period there have been eight business cycles: the average duration onc Rann of the expansion phases has been a little less than five years and the average period way in the spring of 1991, butit fizzled. | © The big difference is cycle and the hope for a recovery from the recession that began in July 1990, 1992 was that the Federal Reserve a | of recession has been slightly less than one year. This article discusses the business more accommodati The lower interest ‘#6 Define a business cycle and its components: contraction, trough, expansion, b tes Becaaealeaen ga eal aoe rouseholds, with | household net worth. @ Explain why there is considerable uncertainty in forecasting the start ofa up by 6.6 percent in recovery or other phases of the cycle 1991, @ Households spent their extra cash, causing employment to increase. ‘Alter studying your text, reading the article, and answering the questions, you should be able to: 4 Describe the postwar movements in economic activity + ne worry among home builders was tat mortgage rates would rise and choke off the recovery. 253ohn P, O'Leary doesn’t need governmentforecasts to tell him where the economy is going. Since early February, the chief executive of Tuscarora Plastics, a packaging-mate- rial maker, hasseen shipments and new orders take off, That's all the data he needs. “Our business indicates thatthe economy is getting better,” he say: Just two weeks ago, O'Leary's as- sessment mighthave seemed like ustso much wishful thinking. But then, on Mar. 12, the Commerce Dept. an- nounced that retail sales had jumped 1.3% in February, on top of a 2.1% surge in January. Fivedays later, ina St. Patrick's Day trio of reports, came more good news: Industrial production picked up by 0.6% in February—its firs rise in five months, Housingstartssoared by 9.6% during the month, to an annual rate of 1.3 million—the busiest pace for build- ers since March, 1990. And consumer prices climbed just 0.3% in February, implying a modest inflation rate of 3% annually On Mar. 18 came yet another piece ofevidence: The Federal Reserve's sur- vey of activity within its 12 regions was also upbeat. In their “Beige Book,” the central bankers reported a “slow but widespread advance in the economy since the end of January.” Second Coming So listen up, America: Justasspringarrives,i'slook: ing as ifthe economy is at last on the ‘mend. The thaw comesafter 19 months of recession and stagnation—possibly the longest postwar slump on record. ‘Thebrutalretreatsent 1.Smillion people to the unemployment line, put some 148,000 companies out of business, and made American consumers feel sglummerthan they had since 1974—on The Recovery Is Here at Last the heels of Watergate, the first oil crisis, and severe recession. Indeed, convincing consumers that the recession has ended may be the hardest part about keeping this expan- sion going, After all, the promise of a rebound sounds eerily familiar. Last spring, citing increased industrial pro- duction and rising retail shopping, economists and Washington policymakers declared the recession ‘over. Butby fall, the U.S. economy was again dead in the water. This time, economists spot one big difference: amoreaccommodating Fed- eral Reserve, “The Fed has eased much more dramatically in the pastyear than in the year before,” says Nancy R. Lazar, an economist at the Interna. tional Strategy & Investment Group. Indeed, the federal funds rate—the rate banks ‘pay to borrow from other banks—now stands at 4%. That's roughly half its level in late 1990, The result? Consumers and busi- nesses have cleaned up their balance sheets by replacing high-yield borrow- ings with cheaper debt. DRI/McGraw Hillestimates, for instance, that house- hold net worth grew by 6.6% in 1991, after falling in 1990 for the fist time since 1962, *Cash flow has been sub- stantially enhanced by mortgage refinancings, paying down debt, and tapping into home-equity loans,” ob- serves Michael R. Paslawskyj, chief economist at CIT Group, lender to ‘midsize companies. New Hires All that extra cash has sent consumers back into the malls, edging into auto showrooms, and thumbing through real estate listings. Although they’renorgobbling up goods and services the way they did in the "80s, there are signs of a new willing. ness to spend. Take Mark and Laura Greifenkamp. The couple recently boughta Saturn, even though they could have afforded a more expensive car. And they are about to close on a $225,000 house in the Chicago suburb cof Western Springs. Mark Greifenkamp, a supervisor at hospital supplier Baxter International Inc., expects that after they move in “we'll spend another $5,000 in the blink of an eye.” Even the unemployment picture seems brighter—anotherimportantdis- tinction between lastspring’s false start and this year’s upturn. The economy slipped backinto recession astfall partly because American business continued to lay off workers, That hammered personal incomes and slammed con- sumer spending, Now, signs of life are sprouting in the labor market: Nonfarm employ- ‘ment rose by 164,000 jobs in Febru- ary—although economists warn that the bulk of those new hires came in the retail sector, where work is often part- time. But looking ahead, Stuart G. Hoffman, chief economist at Pittsburgh's PNC Financial Corp., thinks that atleast 100,000 new jobs will beadded, on average,in each ofthe next few months. Indeed, businesses, particularlysmall and midsize outfits, say they're getting ready to hire again. Acme Brick Co. in Fort Worth may be adding 120 work. 18 to its payroll of 1,500. That means the company, a unit of bootmaker Jus- tin Industries Inc, should operateits 16 plants at about 80% ofcapacity within the next month, up from 72% now. *I feel cautiously optimistic,” says Presi- dent Edward L. Stout Jr. Times are also busier at Crown Equipment Corp. in New Bremen, Ohio. In February, the maker of electric lifttrucks called back 120 of the 400workers it had laid off last year. And Beaver, Pa., the engineering firm of ‘Michael Baker Corp. plans to add 260. 10 390 new employees toits work force of 2,600. ‘HouseRule Amid all the evidence of a budding recovery, however, there lurks a spoiler: long-term interest rates. Bond traders, worried about inflation and a massive supply of Treasury debt, have bid long rates up above 8%. After adjusting for inflation, real interest rates areatabout $%—the highest level since 1988. The Fed, which has little sway ‘over Jong rates, is anxious about ‘Washington's pileup of IOUs. Fed ‘Chairman Alan Greenspan worries that "The Recovery ls Here at Last.” Reprinted from March 30, 1992ssue of Business Week by special permission, new Treasury borrowings, along witha return of corporations to the credit markets, could cause some crowding out and keep long rates higher and economic growth lower than normal. ‘One concern is that housing, a key ‘componentina recovery, willtakea big hit if moregage rates climb much higher than 9%. For now, the rebound in housing is spurring pickup in the production of related items. Appliance ‘output jumped 4.6% in February, for instance, and furniture makers are see- ing beteer demand, The American Fur- niture Manufacturers Assn. iscautiously projectinga 3.7% increase inshipments ‘copyright ©1992 by McGraw Hil, ne. for 1992. Thatwould bewelcome ei after the industry's four-year do ‘urn, ‘That'ssomeslump. And it’s the duration ofthe nation’s downturn that has economists convinced the uptuca is really heve. “There is a replacement cycle. The kig-ticker items—the cars, the refrigerators—that people bought in the 1980s are getting old,” says PNC Financial's Hoffman. More importapt, say othereconomists, the U-S.economy hhashad time to getits financial housein order. Last year was simply too eatly foran upturr, This spring, it looks a4 if the recovery has taken root for g pinta inna meal ai gaa ae.questions E31 J QU E's T 1 Ones a) Define the term “business cycle.” \ b) What ae the component phases of a business cycle? | ‘c) What phase was the economy in when the article was written? Justify your opinion. | 4) What typically happens tothe economy in & recovery (or expansion) phase? 4) Disnguish between the tems ecesin and depression Was the downtum of 18-1982 a recession ora depression Explen your answer Ifthe recession that started in July 1990 had ended in February 1992, 2). how would it have compared withthe average recession ines of duration? Explain the reason for your bel 1) how would ithave compared withthe average recession in tems of intent? Explain your answer. ¢)- how long woul the subsequent expansionary phase have lasted, given the average length of previous recoveries? Explain te relatonship between the phases ofthe business cycle and 2) real sales.nthe spring of 881, ctng inreasedindustial production and rising retail sales, policymakers and some economist declared the recession tobe ver. By the fall of 1991, t was obvious that these forecasters were wrong. ‘Why did they err?