San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The U.S. Recession of 2001-2002

Recessions are defined in terms of declines in real GDP. By this definition the U.S. entered a recession in the third quarter of 2001 but statistics other than real GDP indicate that the problems for the economy developed in the summer of 2000. The current dollar and constant dollar (1996) GDP for the past sixteen quarters are shown in the table below.

U.S. Quarterly GDP, Seasonally Adjusted, in Current and 2000 Prices
Quarter GDP
Current $
2000 $
1998 I8627.88396.3
1998 II8697.38442.9
1998 III8815.58528.5
1998 IV8984.58667.9
1999 I9093.18733.5
1999 II9161.48771.2
1999 III9297.48871.5
1999 IV9522.59049.9
2000 I 9,629.4 9,695.6
2000 II 9,822.8 9,847.9
2000 III 9,862.1 9,836.6
2000 IV 9,953.6 9,887.7
2001 I 10,024.8 9,882.2
2001 II 10,088.2 9,866.3
2001 III 10,096.2 9,834.6
2001 IV 10,193.9 9,883.6
2002 I 10,333.3 9,977.3
2002 II 10,426.6 10,031.6
2002 III 10,527.4 10,090.7
2002 IV 10,591.1 10,095.8
Source: Department of Commerce, Bureau of Economic Analysis

For the last two quarters of 2001 the current value of the GDP went down but, because of an estimated decrease in the price level, the real value of the GDP increased 0.2 of 1% from the third to the fourth quarters. While this cast doubt on whether a recession occurred in last part of the year 2001, there is evidence that some economic trouble developed in the economy from the middle of 2000. This can be seen from the chart for private domestic investment, shown below:

The chart shows that real private domestic investment which is made up of purchases of plant and equipment, new house construction and net inventory investment reached a peak in the second quarter of 2000 and has been declining since then. By the second quarter of 2001 this real investment was down by almost eleven percent, based upon the preliminary 2001 III figures. The decline is in plant and equipment investment and inventory investment; new resident fixed investment (new house construction) held steady. Inventory investment was substantially negative; businesses were selling off their stocks of goods and not replacing them.

As to what accounts for the decline in investment it is instructive to look at some other economic statistics. For example, in the chart shown below, it is found that corporate profits (after taxes) also reached a peak in 2000 and since have declined.

Profits, before tax and after tax, peaked in the mid-2000 and have been declining since then. Investment is geared to the potential future profits rather than current profits but a decline in the profitability of past investment would surely depress the prospects for future profits from current investments. It is notable however that the decline in profits from the end of 1997 to the end of 1998 did not have much of an effect on real investment in 1998. There was a slight decline in investment in the first quarter of 1998 and then an upsurge.

The chart for the stock market price level shows a similiar picture, a peak in 2000 and a decline since then. This is probably an effect of the other factors rather than a cause.

Industrial production shows the same pattern, a peak in 2000 and a decline since then.

It is worthwhile to look at what was happening to interest rates over the last few years. A chart for three interest rates is shown below:

The discount rate fell substantially and the T-bill rate fell with it. The interest rate on corporate bonds, the rate which is more relevant for investment decisions, shows much less of a decline.

Since monetary policy of the Federal Reserve influences interest rates it is worthwhile to note what has been happening to the money supply.

It is notable that nominal M1 was declining throughout 2000. While M1 increased in 2001, and substantially so in the last few months of 2001, the increase did not offset whatever factor was accounting for the decline in investment.

The statistical picture of the economy is not complete without a look at what has been happening in the labor market.

The labor force continued to grow but a declining rate in 2000 and 2001. Employment peaked at the beginning of 2001 and has been declining since then. Unemployment which had been showing a wonderful downward trend until 2000 began to rise. Although recessions are defined in terms of real GDP it should be the unemployment rate that defines a condition of social and economic stress.

The trend in consumer outlays (consumer purchases plus interest payments on consumer debt) is shown in the chart below along with the statistics on consumer disposable income. The difference between the two curves is personal saving. Personal savings has been showing a declining trend but at about the beginning 2000 personal saving went to virtually zero, as shown below.

One final element of the statistical picture is given by the government budget. At about the start of 1998 the Federal budget went into surplus. The surplus continued to grow but in 2001 there came a decline in the level of the surplus.

HOME PAGE OF applet-magic
HOME PAGE OF Thayer Watkins