Tuesday, July 8, 2008

The U.S. economy: Not in a recession until the fat lady sings

This photo illustrates an economy that I will argue is not in a recession. Job growth is negative, but there are macroeconomic variables, other than employment (unemployment), that are used to define a recession. The verdict is not in; the fat lady has not sung; the debate continues; it ain’t over ‘til it’s over.

The data suggest that the U.S. economy is not in a recession. It is certainly growing below its full potential, but Wall Street and the media will have you believe it is the 1970’s and 1980’s all over again. Let me assure you that it is not.

In his article at the L.A. Times, Stocks end mixed following jobs, services data, Tom Petruno wrote:

The debate over whether we are, or aren't, actually in a recession will go on, but to some analysts there's no question anymore. Merrill Lynch & Co. economist David Rosenberg says the lesson from history is that "you don't have six consecutive monthly declines in payrolls and not be in an outright recession."

David Rosenberg at Merrill Lynch is literally my antithesis. I have met Rosenberg, and he is definitely an intelligent and dynamic economist. However, I am the optimistic economist (yes, there are some of us) and he is the eternal pessimist. In fact, he is so pessimistic that only 2 of his last 12 recession predictions were actually correct. Many on Wall Street are equally pessimistic.

I disagree. The data indicate that the U.S. is struggling but not contracting. A recession is defined across an array of macroeconomic variables including employment, personal income (your income earned minus tax payments), wholesale and retail sales, industrial production (manufacturing, utilities, and mining), and last but certainly not least, GDP (gross domestic product, or income of the U.S.).

To define a recession, the two consecutive quarters of negative growth rule is actually a fallacy. The National Bureau of Economic Research (NBER) is in charge of dating a recession, and if 2008 is a recession year then it will show up on the NBER’s website; notice, it is not there right now.

The charts below illustrate current growth in industrial production, income, and GDP. It is obvious that the three statistics are struggling and their growth rates are low and falling. However, each statistic is well-above any level seen in the last 5 recessions. I would say that the economy is certainly in danger of a recession, but the recession hawks on Wall Street must present a stronger case.

David Rosenberg added the following statistic to prove his case: "you don't have six consecutive monthly declines in payrolls and not be in an outright recession."

As a defense to optimism, December 2001 through September 2002 marked 6 consecutive months of non-recessionary job loss (data available at the Bureau of Labor Statistics). According to the NBER, the U.S. economy was expanding (a.k.a. not in a recession). Six months of job loss is not a means to calling a recession.

It is very important to distinguish between sector contractions and total economic contractions. The housing and manufacturing sectors are examples of sector-specific contractions. Newly built single family homes are down -3.3% over the month, new home sales are down -2.5%, home values are down -15% over the year, and manufacturing production is flat over the month (negative last month). The two sectors affect a large portion of the population, but the economy as a whole is still expanding (however sluggishly).

There are certainly risks going forward. For one, energy and gas prices may force many families to cut down on their expenses in order to pay for gas. Further cuts in spending will most certainly lead the economy into recession. Consumer spending is extremely important in measuring GDP – if that falters, GDP will falter, and the economy may very well find itself in the dumps.

So you have it. The data favors the optimists, and the U.S. economy is not in a recession as of May 2008 (roughly speaking). However, the recession bears like David Rosenberg may get their day in court if problems get worse…or even persist.

The future of the economy depends on the following: a rebound in the housing market, a slowdown in energy prices, stabilizing crude oil prices, and new jobs being made available. Let’s hope for the best.

Please leave comments. I am happy to read and respond to them. Best, Nontruths.

1 comment:

  1. Those charts are very interesting, especially the first. The last real hit (that I remember) to the real estate sector was back in the early 1990's and it took a number of years to recoup the value of 1989 but it did do it and go on to greater things. The old saw that "bad news travels fast" is true once again. Seems like the pundits all WANT us to be in a recession. Guess it is also a partial result of the ability to get instantaneous news. Janie


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