Anatomy of a recession.

• Author: Brock, Horace W.

By now, it is widely acknowledged that the 1990-1991 recession has been different from past recessions in significant ways. The most significant of these differences is that the Federal Reserve Board did not cause the recession by a hike in interest rates, the classic cause of recession. To the contrary, the Fed eased its bellwether Fed funds rate considerably during the 14 months before the recession began.

Even though this recession is different from those that preceded it, the market has stubbornly held to the historicist view that a recovery will arrive later this year, and that it will be fairly robust, with year-end GNP growth in the range of 3 percent.

While positive growth probably will reemerge before the end of this year, the forecast for a robust recovery will most likely prove to be too optimistic. A number of structural changes beset the U.S. economy in the early 1990s, which augur a period of sluggish growth. It is important to note that these are truly structural changes, not cyclical ones. Indeed, these changes predated and, in fact, helped precipitate today's recession - and they will continue to influence the economy after the recession is over.

Restructuring in the service sector

The first of these structural changes is perhaps the least understood by the market and by the financial press in general. Since the service sector is large and heterogeneous, it will suffice to cite developments in three of its constituent sectors.

* Distress in retailing. While debt growth (Robert Campeau, for example) is usually blamed for the distress in retailing, a much more fundamental force is at work. This force is evident in the ongoing slimming down of Sears Roebuck, where tens of thousands of workers continue to be laid off - a development that predates the recession. The underlying cause of Sears' plight stems from a combination of failing real living standards and the advent of huge no-service retailing technologies introduced by the discount chains. People simply cannot afford the level of service associated with traditional retailers, and one result is an ongoing trimming of service workers. By 1995, an estimated 300,000 jobs will have been permanently lost in retailing since this trend began in the 1980s.

* Distress in banking and financial services. Again, adverse developments in this sector predate the recession. The distress in the financial sector allegedly began with the stock market crash of October 1987, but, in fact, these developments were operating even before the crash. Excess capacity in banking and brokerage has been a longstanding problem in the industry, but it reached crisis proportions during the past four years. Booming financial markets with huge transaction profits masked this reality, which has now hit home with full force.

* Real estate brokerage and related fields. Similar developments characterized the explosive growth of real estate brokerage, title insurance, and related financial and legal services during the 1980s. Employment boomed artificially because of demographic, regulatory, and tax changes, and it peaked during the period of...