Is The Business Cycle Dying?(Brief Article)

Something strange happened as recession threatened the American heartland. From their perch high in the gleaming glass towers of the Renaissance Center overlooking the decay of downtown Detroit, Michigan, the top executives of General Motors saw trouble approaching. Having invested billions in new computers and information technology during the boom of the late '90s, GM spotted the coming downturn in weak sales reports from the field. "Undoubtedly, it helped," says GM chief economist Mustafa Mohatarem. "We get much better information more quickly and we can react much more quickly... We could see the slowdown coming."

And act. General Motors and the other big car companies slashed production by more than 20 percent, laid off tens of thousands and introduced the biggest discounts and givebacks in history. True, all the discounts cut sharply into profits, but if sales continue at the current pace they will reach 17 million vehicles--second only to the U.S. record set just last year. Storage lots were filling with cars only a few months ago, threatening to choke off growth in the economy at large. Now the inventories are at normal levels, and the mood in Detroit is moving from fearful to gleeful. "We're much more confident," says Mohatarem. "Autos and housing are the two drivers in the economy and they're holding up much better than in previous downturns."

As the world puzzles over confusing signals from the American economy, the expected recession may--just may--not arrive. Even before the first signs of trouble, economists were saying the next downturn would be the most closely watched one since World War II. They are looking for proof of the theory that America's high-tech New Economy would prove recession-resistant, using the lubricating flow of fast information to loosen bottlenecks and dampen the highs and lows of the business cycle. With each passing month, as growth limps but stops short of falling into the red of recession--normally defined as two straight quarters of negative growth--this theory seems more plausible. In a speech last week, Fed governor and onetime New Economy skeptic Laurence Meyer said, "The shape of the slowdown has the New Economy written all over it."

It would be difficult to overstate the implications. Bust has followed boom for as long as anyone has tracked modern economies, and the United States typically goes bust with a thwack. The last recession came in 1990, when growth plummeted from 1.7 percent in the first half to negative 3.9 percent by the third quarter. This time, the economy has not actually shrunk at all. Unemployment is near its 30-year low. Indeed, two weeks ago Treasury Secretary Paul O'Neill declared the threat of recession over and predicted a return to 2 percent to 3 percent growth for the rest of this year.

If he's right, it would be ...