Why is it taking so long to turn this economy around? The answer is really quite simple: There was far too much binge eating going on during the 1990s. And now we're paying for it. The economy began to shed some of its excess weight gain in 2001, and went on an even stricter diet in 2002.
But just for a minute, let's go back to the decade when anything and everything seemed possible. Virtually every industry was expanding. And the rush was on to create empires in every sector: Companies hired more people and added more facilities to make way for the increased demand for their products. In addition, there was plenty of money available, through earnings as well as financial markets, to obtain the capital needed to invest in the technologies that would make it possible for companies not only to produce more, but to differentiate their products from the competition as well.
Unfortunately, the warnings of excessive exuberance came too late. In April of 2000, the worm appeared in the apple — and it wasn't long before the apple dropped from the tree. But the apple was so high up that it took a while for most people to even notice that it was on its way down.
Denial was pervasive throughout the financial markets until the drop was clearly in sight, which was about a year after it had begun. To make matters worse, it was just about this time that apples in other places — Japan, Europe, South America, Latin America, and Africa — began to show signs that worms had infested them, too.
Let's leave the fruit analogy aside and move on to the nuts. During the 1990s, a significant cache of nuts was found that made everyone feel rather comfortable about the ability to weather any future storm. Unfortunately, the largest portion of this stockpile — literally, stock market values — had a limited shelf life. The confluence of events that took place in late 1999 and early in 2000 exposed the cache's vulnerability and exacerbated the rush to withdraw whatever could be salvaged.
It's important to understand what happened in the '90s because it explains most of why it's taking so long to turn the economy around. Although we don't know what kind of impact the war in Iraq will have on our economy — other than to say it might not be negligible — the economy is fundamentally strong.
For the most part, people who have jobs are receiving wage increases that are more than the rate of inflation. Therefore, their purchasing power is on the rise. In addition, taxes have been lowered, giving consumers more money to spend. We should also realize that in absolute numbers, more people are employed now than during any year of the 1990s. In addition, fewer people are unemployed than during 1990 through 1994, which included the last recession.
But this recovery will be different from the last one. The major reason is the pain felt by everyone when the apple hit the ground this time around. There is barely a sector of the economy that was not affected. Companies are now far less likely to be overly exuberant.
I'm not saying there won't be a recovery, or that it won't be of significant size and duration by historical standards.
Once automatic stabilizers are in place — re-stocking low inventories and ramping up production to meet increased demand, companies will start hiring again. This should give consumer confidence a big boost, and with that an increase in consumer spending. In addition, businesses that have put off investment in plant upgrades and equipment replacement will once begin spending money in those areas.
That's mother nature — predictable in some ways, but not in others. This recovery will happen; we just don't know when.