The 1992 Outlook for Kansas and the Nation

Abstract

A recessionary phase of the U.S. economy began sometime during the third quarter of 1990, and appears to have ended late in the second quarter or early in the third quarter of 1991. The recession was characterized by weak spending by consumers and a significant episode of inventory reductions by firms. Consumers, whose confidence was eroded by uncertainty about the situation in the Middle East during the early part of the recession, and uncertainty about the faltering economy during the latter stage, reduced their real spending in the last quarter of 1990 and again in the first quarter of 1991. A small increase in the second quarter of 1991 still left consumer spending below the level that it had attained before the recession began. Consumption of durable goods was particularly hard hit by the recession; real consumer spending on durable goods during the second quarter of 1991 was 6.5 percent below its pre-recession peak. During the same quarter, real consumer spending on nondurable goods was 1.5 percent below its pre­recession peak, while real consumer spending on services was just 2.0 percent above its pre­recession peak.

The inventory reductions by firms were at least as dramatic as the weakness in consumer spending. During the three quarters beginning with the last quarter of 1990, nonfarm firms reduced their inventories by over 21 billion dollars. By the third quarter of 1991, the inventory to sales ratio of firms had dropped below 1.5. Investment spending by firms was also weak during the recession. Firms spending on equipment was 3.0 percent less in the second quarter of 1991 than before the recession began, while firms spending on new plant was 10.5 percent less. Residential investment was 16.4 percent less than it was before the recession.

The poor performance of the consumption and investment sectors of the economy during the recession was at least partly offset by the foreign sector; for the half year beginning with the fourth quarter of 1990, exports grew at a 5.6 percent annual rate while imports declined at a 10.4 percent annual rate. Thus, the gap between exports and imports measured on the national income and products accounts basis grew at nearly a 54 billion dollar annual rate. Furthermore, government spending grew moderately during the recession, spurred by a 12 percent increase in defense spending in the last quarter of 1990.

The recovery should begin sometime during the third quarter of 1991 and continue through 1992, with GNP growing 2.0 percent for the year. The recovery will not be strong, however, as the rate of output of the economy does not reach its pre-recession level until sometime in the first quarter of 1992. The recovery will be led by stronger consumption spending and a movement by firms to replenish the inventories that they drew down during the recession. Increased investment by firms in new plant and equipment will contribute to the recovery to a lesser extent. On the other hand, the recovery will see the return of strong import growth, which, coupled with moderate growth in exports, will lead to a worsening of the deficit in net exports and weaken the recovery. Government spending will also decline in 1992, providing no direct stimulus to the recovery. However, large increases in transfer payments coupled with small increases in tax receipts will cause the budget deficit to increase, providing some indirect stimulus on the income side of the economy.