WHAT SLOWED THE RECOVERY?
The 1990-1991 recession lasted the usual length, but there were two significant areas
hobbling the start of a recovery. One area was the public's gloomy outlook. Many believed that
there was no hope for a speedy recovery. A University of Michigan index indicated that consumer
confidence fell 1.1 points in January of 1992 to 67.1 percent, continuing a four-month slide
(Somerville, 1992). This reflected consumers' continued reluctance to spend. This mood cannot be
pinpointed to one particular cause, but to a combination of factors. A Wall Street Journal/NBC
News poll indicated that 53 percent of the people who responded felt that the U.S. was in a state of
general decline. Other polls showed a lack of confidence by Americans that their children would
live better than they did (Murray, 1991).
Part of the reason for this attitude can be traced to the drop in home values. Often this is the
largest single asset for an individual, and serious declines in value cause a significant drop in net
worth. While the perceived change in wealth may be greater than the actual drop, for a public
accustomed over the past 10 to 20 years to ever-appreciating home values, any drop comes as a
shock, and it has forced many to reconsider their financial planning. The cost of their children's
college educations and their own retirement may not be coming from the equity in their home, and
the only way to replace this lost equity is to reduce spending.
Consumers were also burdened with the heavy debt-load incurred from the 1980s spending
spree. The combination of debt and the pessimistic outlook of most mean there is little incentive
to borrow. Cornerstones of past recoveries were construction and auto sales, but new-home starts
in the early 1990s were at their lowest level since 1946 and auto sales fell to the lowest level since
1982. The Fed's effective policy of lowering interest rates did not induce consumers to borrow and
spend, which ordinarily would jump-start these cornerstones of past recoveries (Thompson, 1992).
A second area of prime concern was the level of capital spending. Higher profits made
capital investment possible. This led to higher employment levels, reduced costs, and improved
products--all of which boost economic growth. Following past recessions, corporate profits came