United States Recession of 2001-2002 Term Paper

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This marked the fifteenth consecutive month of factory job losses.

In a "normal" recession, recovery begins as cuts in interest rates that induce increased consumption spending. This, in turn, leads to increased production to meet demand and eventually to increased capital spending. However, in the recession of 2001-2002, consumption spending did not fall because it was sustained by the cuts in interest rates carried out by the Federal Reserve Board over the previous 2 years. The only real basis for a recovery is an increase in business capital spending and it is here that some of the intractable problems of the United States economy are most clearly seen. Interest rate cuts have little or no impact here because the major problem confronting business is not lack of credit but lack of profitable opportunities.

Pre-tax profits as a share of business product for the non-financial corporate sector rose to 8.7% in the first quarter of 2003 against the low of 7.2% in the first quarter of 2001. This rise, however, was still well below the peak of 12.

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8% reached in the third quarter of 1997 and almost 1.5% below the post-1970 10.1% average (Tieman, 2001). The economic problems generated by lower profit rates are compounded by the fact that lower interest rates and higher budget deficits, both of which tend to stimulate economic growth, are having increasingly less impact.

The other major factor which may push interest rates up is the worsening United States balance of payments deficit, now running at around $500 billion. If for any reason investment inflows into the United States falter, then interest rates would be forced up, possibly setting off a deep-going recession in the United States and global economy. Compared to other post-war recessions, the downturn of 2001 was one of the shallowest on record. However, viewed within the wider context of the deep-going structural imbalances within the United….....

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