Fed can put off a recession, but it can't prevent one

The Federal Reserve slashes interest rates. Congress considers $160 billion in tax rebates and other spurs to spending. Both moves come as the latest news shows that 2007 ended with the U.S. economy in a crawl.

Will the nation be hit by another recession? It's a sure thing. Just maybe not in 2008.

"The boom-and-bust business cycle hasn't changed, and it isn't going to change," said Kenneth Goldstein, senior economist at the Conference Board, a New York-based business group.

Despite generations of economic study, sophisticated computer models and thousands of statistics that can sound alarms, no one knows for certain whether a downturn will come this year, next year or in five years.

"There always are shocks to the economy. Sometimes there are good shocks, sometimes bad," Minnesota state economist Tom Stinson said. "By their nature, these are unforeseen."

In the last six months, the U.S. economy has been hit by an unprecedented slowdown in home sales, a subprime mortgage debacle that threatens the health of major financial institutions and oil prices that soared to $100 a barrel.

"Sometimes you get two or three bad shocks in a row and that can cause a downturn in the economy," said Stinson, who recently proclaimed that the Minnesota economy is in recession.

History shows that the ups and downs of the U.S. economy are as hard to manage as the waves of an ocean. And government is better at responding to recessions than at keeping them from occurring.

Lower interest rates and tax breaks can ease the pain, but there's no guarantee they'll stop it, experts warn. One reason: cuts in interest rates and increase government spending stimulus can take months to ripple through the economy.

In the past 60 years, the nation has endured 11 recessions, the most recent in 2001. Whether by luck or by government action, that one was one of the shortest and mildest on record.

"We will have another recession," said economist Dan Laufenberg, who does not expect the economy to shrink this year. "I don't think the business cycle has been repealed." In fact, said Laufenberg, chief economist at Ameriprise Financial Inc., recessions are a necessary evil, a way to let bad deals unravel and poor investment bets fail.

"It's part of the process of cleansing the system and allowing it to grow in a more efficient way," Laufenberg said.

In retrospect, the nation's home-building boom -- an upswing that has left many cities and suburbs with a glut of unsold homes -- is evidence that too much money was poured into swinging hammers and raising roofs.

The best news Laufenberg can take from a study of the business cycle is that economists and politicians may not be able to stop recessions but they can make them shorter and milder.

"We've been through so many that we, unlike a lot of economies, we know what to do to recover," Laufenberg said. "We know how to get out of recessions."

Lower interest rates and increased fiscal stimulus, whether through tax cuts or a government spending stimulus, can spark economic growth but take months to work.

Critics who argue that the Fed has been too slow to respond to signs of an economic downturn ignore the fact that the central bank usually succeeds by being more passive than activist, said Nobel Prize-winning economist Ed Prescott.

"The Fed does good by doing no bad," he said. "I think they've been doing a damned good job."

Prescott, a former University of Minnesota economist, now teaches at Arizona State University and does research at the Federal Reserve Bank of Minneapolis.

Does the Fed have the ability to stop a recession, this year, next year or anytime?

No, said Prescott: "It's inevitable."

Nevertheless, he sees a heartening trend in the fact that the stretch between recessions has grown longer over the past couple of decades.

"The economy has gotten more stable over the last 25 years," he said.

Mike Meyers • 612-673-1746