The Recent Recession, the Current Recovery, and Stock Prices

AS OF APRIL 2002 THE signs of economic recovery are sprouting like spring flowers. The United States has emerged from the short but painful winter that followed the burst of the asset bubble in early 2000 and the anxiety caused by the events of September 11 and the anthrax scare in the fall of 2001. This report addresses the current state of the economy. What were the salient characteristics of the 2001 recession? What is the state of the econ-omy today? How does the latest business cycle compare with earlier cycles? What are the initial conditions of and therefore the prospects for the recovery? What are the conditions of profits and equity markets? Although it is clearly too early to write the definitive economic history of the recent downturn, it is nonetheless useful to describe the terrain as it appears in early 2002. 2001: The Mildest Recession To begin with, it appears that the 2001 recession was extremely mild. Real GDP growth was close to zero in the second half of 2001, and unem-ployment rose relatively little. Was it really a recession? For that matter, what is a recession? From the point of view of economic welfare, business downturns are undesirable, and therefore the subject of concern and study, because they