For release: March 8, 2002
Contact: Joe Elstner, (314) 444-8902; Charles B. Henderson, (314) 444-8311

Current Recession Due Mainly to Business Investment Bust: St. Louis Fed's Poole

Link to speech

ST. LOUIS -- The 2001 recession is the most persuasive example in the last 50 years of an economic contraction originating from a business investment bust rather than consumer retrenchment.

That's the view of William Poole, president and chief executive officer of the Federal Reserve Bank of St. Louis, who spoke at the Adam's Mark Hotel to the Southwestern Finance Association's annual meeting.

"Recessions typically exhibit major declines in housing construction and consumer durables," said Poole. "This time, the recession was led by a decline in business investment spending and accompanied by a sharp drop in factory orders for capital goods, both new and unfilled." Poole said the latest numbers for new orders of nondefense capital goods, excluding the volatile aircraft orders component, show an increase of 1.5 percent in January. Shipments of capital goods, excluding aircraft, he added, rose 2.5 percent. These data suggest that the capital spending part of the economy is on the mend, Poole said.

"Business investment last year was driven by a reassessment of long-term prospects in certain sectors, especially telecom, and by adjustment to excess capacity resulting from the prior investment boom," said Poole. "That adjustment is now well along. Assuming final consumption demand continues to grow, excess capacity will be absorbed over the next few years."

Poole told his audience it was important to remember that much information technology capital stock has a relatively short life. "The rapid rate of technical change means that desktop computers and servers are replaced every few years, which means that replacement demand places a high floor under total investment."

Poole said that since the return on investments to enhance efficiency still seems high, "we can expect to see continued capital spending in firms that haven't taken full advance of new technologies." He said there is "every reason to believe" that the U.S. is looking at a healthy revival of investment and the continuing productivity gains that investment will bring.

The St. Louis Fed president said his outlook is based on his belief that the Fed will continue to be successful in adjusting policy to keep inflation low and steady. "Price stability is a prerequisite for sustained economic growth," Poole said. "If inflation expectations break out on the high side, all bets are off as we would then see a classic period of unsustainable exuberance followed by the usual inflation hangover. That is not the future I see, but the Fed will have to stay alert and on the job."

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