Tuesday, April 29, 2008

U.S. recession? Won't know for a long time

The article, Saying Times Are Difficult, Bush Presses Congress to Act, was published in the New York Times on April 30, 2008.

A quote from the article: “In declining to embrace the word ‘recession,’ Mr. Bush said that many Americans were just beginning to receive their tax rebate checks as part of an $168 billion stimulus program, and that it would be some time before the effects of those checks on the economy were clear.

The fact of the matter is: nobody can say whether we are in a recession or not, it is all speculation. The organization in charge of dating a recession is the National Bureau of Economic Research (NBER). You may view the dated U.S. recessions at the NBER website. The website indicates the recessions, expansions, and the number of months after the recession until the recession was actually dated by the NBER. On average, it took the NBER 15 months to date the last four recessions! If President Bush states that we are in a recession in April 2008, the media will be printing a follow-up story if he was wrong (it is unlikely that they will follow up if he was right) in 15 months or so.

Another reason that Pres. Bush cannot say whether or not we are in a recession is that the data The NBER defines a recession as a significant decline in economic activity. The decline is measured using six broad statistics: real GDP, real income, employment, industrial production, and wholesale-retail sales. The table below lists the last four months of data. The obvious mix of green and red data indicates why we cannot say whether or not the U.S. economy is in a recession. cannot clearly point to a recession.

The primary reason why the NBER waits to date a recession is that it takes time to determine an economic trend. First, much of the data covered by the media (employment, industrial production, and wholesale-retail trade) are reported on a monthly basis. Not until several months have passed can a real economic trend, upward or downward, be determined.

Recently, the media reports have turned away from “whether or not we are in a recession” to “how quickly (slowly) will the recovery be.” The stock market is usually said to be forward looking. When making decisions on what stocks to buy, investors often look to the future (as best they can) and try to predict what the health of the economy. Investors that see a stronger U.S. economy will buy stocks now. The figure below shows that the S&P 500 has recently trended upward, roughly indicating a light at the end of the economic-slump tunnel. Put it another way, if we were (are) in a recession, it will likely be over soon.

In truth, nobody knows what is in store for the U.S. With the price of oil hitting record highs, driving up energy prices (mainly transportation and heating concerns for the average consumer), a financial sector that continues to suffer, and a housing crisis that simply won't end, perhaps we can look at a 40-watt, rather than a 100-watt, future.

Please leave any questions/comments that you may have. Nontruths

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