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August 13, 2002
THE ECONOMIC MALAISE CONTINUES
J. Fred Giertz
Three months ago, the Illinois and national economies seemed poised for expansion. There was reason to believe that the recession was over and that recovery was underway even though the stock market had yet to reflect this optimism.
Unfortunately, the economy still seems to be in a holding pattern. The stock market continues to languish. The economy grew in the second quarter of 2002 at only a 1.1 percent real rate compared to the 5.5 percent rate the first quarter.
Moreover, there were downward revisions in the gross domestic product numbers for 2001. The original reports suggested that there was only one quarter of actual decline during the year while the revised numbers show three quarters of negative growth. The so-called minor recession in 2001 was actually more severe than originally believed more in the order of an ordinary downturn similar to 1990. There is now some concern (very likely unfounded) that there may be a double dip recession.
Much of the blame for the economy's lackluster performance is now focused on a growing number of high profile revelations about dubious, if not illegal, business and accounting practices such as those at Enron, WorldCom, and Arthur Anderson. Politicians and journalists point to this as the cause of our current economic problems and suggest that new laws and regulations are needed before recovery can begin.
In reality, these scandals are more a result of the bursting of the dotcom bubble and the economic downturn rather than the cause. The collapse of Enron and WorldCom's problems were the result of some very bad business decisions based on bad bets about the energy and telecommunications markets. To some degree, these problems drove the firms to use aggressive and dubious and possibly, illegal practices. However, even if they used the best of accounting procedures, these firms would still be in deep trouble.
The restructuring that is underway in the information technology, energy, telecommunications, and airline industries is a painful, but necessary part of the recovery. The same is true for improvements in accounting and reporting practices. Unfortunately, this restructuring is more fundamental and is taking longer than most observers expected. The good news is that the economy will be stronger in the long run because of these changes.
There is still good economic news. Consumer spending remains strong and inflation is low. Unemployment is still not high compared to past downturns. The Federal Reserve's decision to keep interest rates unchanged suggests that the Fed believes the economy is on the right track.
The period of watchful and hopeful waiting continues.
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