Tuesday, February 5, 2008

Are we in a recession yet? Are we in a recession yet? Are we in a recession yet?

This is how I feel the media is reacting to the recent onslaught of poor economic news. Yes, the media and the politicians (especially the Democrats) tend to harp on bad economic news. The last time I wrote on the state of the U.S. economy was in November 2007, and things have most certainly changed…….but again, it is not as bad as the media would have you believe. The economy is teetering between falling into a recession and bouncing back from a “slowdown.” I believe that the economy is going to bounce back. If we are in a recession right now, it will be short-lived.

Let’s get a couple things straight. First, if we are in a recession, then we will not know that we are in a recession until much later in time. The dating committee responsible for timing the cyclical patterns of our economy (the National Bureau of Economic Research) takes an average of 15 months following the end of the recession to say that we were in a recession. Dating a recession is a complex task that requires data from many sources, and time for the data to be revised. Second, the definition of a recession is not two successive quarters of negative GDP (income) growth, but much more involved. GDP growth certainly is analyzed in dating a recession, but is complemented by other key indicators such as manufacturing, retail sales, employment numbers, and consumer spending. So, hold on to your hats because you are in for a ride (down the cycle and then up again).

Let’s get something else straight: the data does not indicate a recession right now. Overall, nonfarm payrolls (number of paid jobs) rose over December and fell in January, while the unemployment rate fell in January compared to the high rate in December. The number of claimed unemployment benefits rose significantly over the last week, but are still well-below recession levels and very low over a four-week average. Durable goods orders rose in December (the latest data), but service-spending was not as high as expected. The manufacturing index remains above recession levels, although the non-manufacturing index (services) fell significantly. Taxes withheld are still rising, implying that consumers are earning money to spend. Given the ups and downs in the data, we need to wait around to see the trend in each statistic. One or two months of data is not enough to date a recession – let’s wait a couple more months to see the actual trend in these statistics…up or down.

Let’s get the biggest thing straight: the Federal Reserve Bank and Congress/President are stepping in to relieve the economic strain. On one side of the U.S. economy’s corner is Ben Bernanke and the Federal Reserve Bank. They are lowering the federal funds rate in hopes that other long-term interest rates (mortgages, car loan rates) will follow. With the housing sector in a slump, lower interest rates will result in new mortgage and business loans; this improves economic growth. Provided that there is enough money flowing around (the talked about credit crunch), this is inevitable. Lower interest rates also entice consumers to spend; again, this improves economic growth. On the other side of the U.S. economy’s corner is Congress and President Bush. They have officially formed a bi-partisan friendship in light of the more negative economic outlook, likely passing a new economic stimulus bill. Since the elections in 2006, Congress and President Bush have been arm-wrestling over spending bills, leaving government spending quite stagnant and not adding much to economic growth. Now that they are agreeing on the new stimulus package, consumers are likely to get rebate checks in the mail by May. The stimulus package, worth an estimated $160 billion, will result in higher consumer spending and investment, driving economic growth forward.

In conclusion, if we are in a recession, we will not know if for at least a year. The data is not painting a clear picture right now – we may bounce back quickly. Finally, we have two driving forces that will aid the economy in the coming months: the Federal Reserve Bank and Congress.

Oh, and see related article: We Need the Bush Tax Cuts Now More Than Ever!

1 comment:

  1. Hmm.... maybe you should write a follow-up.