The U.S. economy: the great expansion ends.

• Author: Green, R. Jeffery

As we look at the economy in late 2001, after he terrible shock of September 11th, it is easy to see signs of a significant downturn. The National Bureau of Economic Research (NBER) has recently announced that a recession began in March of 2001. How deep will it be? How long will it last?

The dates associated with economic recessions and recoveries are determined by the National Bureau of Economic Research. A recession begins when the NBER decides the economy has reached a peak and ends when the economy reaches a trough. The duration of the recession is the length of time, in months, between the peak and trough. The NBER recently decided that the peak was reached in March 2001. However, this was a difficult choice since different parts of the economy were behaving in very different ways.

An early sign of trouble in the economy was the bursting of the Internet bubble in March 2000. The Internet and technology-heavy NASDAQ reached a peak on March 10 before beginning a dizzying fall. As Internet companies began to suffer, spending on new technology slowed and then declined. Growth in real GDP slowed significantly, from 4.2 percent over the four quarters ending in the first quarter of 2000, to 2.5 percent over the four quarters ending in the first quarter of 2001. The Index of Industrial Production peaked in September 2000 and declined by 5.8 percent over the following twelve months. Real investment spending on communication and information processing equipment peaked in the fourth quarter of 2000. Also, as the high tech sector unraveled, employment gains slowed and then stopped. Establishment employment peaked in March 2001 while the unemployment rate reached a low of 3.9 percent in September and October of 2000. Firms also began to trim inventories in the first quarter of 2001 (see Figures 1,2 and 3).

[FIGURES 1-3 OMITTED]

Despite all these signs of weakness, other parts of the economy continued to show some small gains. Real GDP continued to grow through the second quarter of 2001, and real consumer expenditures and real disposable personal income continued to increase through August 2001. Considering all these indicators, by September 11th the economy was either in a recession or was barely avoiding one.

Because of the complex movements of the economy any date between September 2000 and September 2001 was a candidate for selection as the beginning of the recession. The NBER considers depth, duration, and dispersion when deciding whether a...