Adjust Text Size> Although just a whisper earlier this year, in the last month, prominent economists from former Federal Reserve Chairman Alan Greenspan to former Treasury Secretary Lawrence Summers have spoken the word out loud: recession. Even Federal Reserve Chairman Ben S. Bernanke in his Semiannual Monetary Policy Report to the Congress on February 27, 2008, stated bluntly, “The economic situation has become distinctly less favorable since the time of our July report.” (You can read the full text of Bernanke’s remarks at: http://federalreserve.gov/newsevents/testimony/bernanke20080227a.htm)
While it’s debated on morning talk shows whether the deflation of the largest and longest-lasting housing bubble in U.S. history will make it all but inevitable that the United States plunges into a recession in 2008, there’s been no shortage of efforts to provide the sharp short-term economic stimulus that could enable the nation to dodge recession or, in event that that isn’t possible, to minimize a recession’s pain. For instance, the Federal Open Market Committee (FOMC) has slashed its target for the federal funds rate, the rate that banks charge when they lend money to other banks, by a total of 225 basis points since September 2007, which included 125 basis points in January alone. Big picture, the FOMC intends the rate cuts to help promote the sort of growth necessary to avoid a recession. Also, President Bush signed a $168 billion stimulus package of personal tax rebates and business tax cuts that could bolster consumer spending later this year and minimize the pain of a possible recession.
Clearly, these bold moves seem to indicate that we could be staring a recession in the face. However, interestingly, in spite of stock market volatility, long-term interest rates below short-term rates, higher unemployment, the persistent decline in housing, and weak consumer spending, the National Bureau of Economic Research (NBER), a non-profit group based in Cambridge, Mass., the generally accepted arbiter of when U.S. recessions begin and end, has yet to declare a recession.
The NBER defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales.” Notably absent from that definition is the commonly-held public opinion that a recession is marked by two consecutive quarters of decline in real GDP. Of course, silence from the NBER cannot be read as proof that the U.S. is not treading in recessionary waters. For example, it wasn’t until November 2001 that the NBER declared that a recession had begun earlier that year in March.
Despite continuing turmoil in the housing and financial markets, a recent Conference Board report points to a number of positive signs that indicate that a recession is not imminent. Specifically, Gail D. Fosler, president and chief economist of the Conference Board notes in the Conference Board publication StraightTalk that while the correction in the financial sector is just beginning, the correction in the housing sector is nearly over. What’s more, although the U.S. economy has weakened, business activity and corporate profits continue to rise.
“Consumer spending is continuing to grow at a rate of 2 to 2.5% a year, and with the exception of the auto industry, the economy is showing gains virtually across the board. Exports are booming and imports and import penetration are down,” says Fosler. “The business sector is also benefiting from the export boom and strength in corporate activities outside the U.S. exports are rising at about a 13% annual rate, and the slowdown in imports means that U.S. companies are taking a larger share of U.S. demand. The improvement in the trade sector alone is likely to add about a half percentage point to growth this year – more than offsetting the decline in housing.”
Although the economic outlook is uncertain, the Conference Board report stresses that the economic shocks from the contracting financial sector are not enough to tip the U.S. economy into recession. Arguing that it will take more to push the economy into recession, the report notes that when the last deep recession in the U.S. economy began in 1990, the economy first weathered the 1987 stock market crash and the 1988 savings and loan crisis before being plunged into a recession by the Gulf War. And, in more good news, the report provides perspective noting that the 2001 recession was short-lived, and despite huge losses in the technology and manufacturing sectors, there was almost an undetectable decline in GDP.
While many economists point to sluggish consumer spending as a harbinger of recession, Fosler points out that the consumer sector has slowed gradually over the past two and a half years to the 2 to 2.5% range from above 4% in mid-2005 in response to higher gas prices and low demand for automobiles. “The slowdown in consumer spending is part of the rebalancing of the U.S. economy,” she concludes. “Americans have enjoyed over two decades of continuous consumer spending growth, which is one of the causes for the large trade deficits over the past decade. These gains go well beyond the normal term of an economic cycle and diminish as consumer needs are met or even over met.”
Of course, there’s plenty of additional data to support the economy is in or heading for a recession. For example, in addition to plummeting stocks and increasing numbers of housing foreclosures, the Philadelphia Fed’s general business conditions index, a gauge of the health of the region’s manufacturing sector, moved to a minus 24.0 reading in February, its lowest level since February 2001, and a fall from minus 20.9 in January. Economists were quick to point out that the third straight negative reading for this indexis reminiscent of the sudden slide into negative values that developed in December-March, just before the 2001 recession.
In an recent New York Times opinion piece, Stephen S. Roach, the chairman of Morgan Stanley Asia, notes that just as the “bursting of the dot-com bubble led to a downturn in 2001 and 2002, the simultaneous popping of the housing and credit bubbles is doing the same right now.” However, Roach believes this recession will be deeper because while the dot-com-led downturn was set off by a collapse in business capital spending, which at its peak in 2000 accounted for only 13% of the nation’s GDP, this recession is induced by a drop in consumer spending, which accounts for a record 72% of GDP.
Google the word “recession” and it seems clear that the recession debate is destined to see-saw back and forth. Some economists insist recession could be averted by rate cuts and an economic stimulus package, while others say we’re in a recession already. However, more important than when and if a recession has started is what the long-term impact of the downturn might be on your family. Drawing from data on the last three recessions, the Center for Economic and Policy Research, a think tank based in Washington, D.C., forecasts that a recession this year would cause deep and lasting damage to working families, continuing long after the NBER says the recession is over.
The Center for Economic and Policy Research’s January 2008 report What We’re In For: Projected Economic Impact of the Next Recession by John Schmitt and Dean Baker underscores that for the labor market recessions are long and protracted events. Specifically:
If the next recession follows the pattern set by the three most recent downturns, a recession in 2008 would raise the national unemployment rate by between 2.1 (a mild-to-moderate recession) and 3.8 percentage points (a severe recession along the lines of the early 1980s), increasing the number of unemployed Americans by between 3.2 million and 5.8 million.
Based on the historical pattern, the unemployment rate and the number of unemployed would continue to increase through 2010 (to 6.7% in the case of a mild-to-moderate recession) or 2011 (to 8.4% in the case of a more severe economic downturn).
In the event of a mild-to-moderate recession, health insurance coverage would fall 1.4 percentage points nationally, leaving an additional 4.2 million individuals without health insurance.
A mild-to-moderate recession would reduce the median family income by just over $2,000 per year (in constant 2006 dollars) by 2010. A severe recession would reduce inflation-adjusted median family income by almost $3,750 per year by 2011.
A recession would also increase the national poverty rate by between 1.6 and 3.5 percentage points (from a 2006 level of 12.3%), raising the number of individuals living in poverty by between 4.7 million and 10.4 million people.
(You can read the full report at: http://www.cepr.net/documents/publications/JSDB_08recession.pdf)
While there’s not too much agreement as to whether or not the economy is in recession, more agreement comes on the question of whether a recession, current or hypothetical, will be mild. According to the NBER, there have been 32 recessions since 1854, lasting an average of 17 months. However, since 1945, recessions have averaged just 10 months, while the duration of the last two relatively mild recessions, 1990-1991 and 2001, was just eight months (you can review the data in detail at: www.nber.org/cycles.html). Also, as Chairman Bernanke promised in his recent remarks to Congress that the “FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” the one near-certain result of ongoing recession concerns and debate is that interest rates likely will continue to fall.
Sources:
http://www.nber.org/cycles.html
http://online.wsj.com/article/SB120078173684203245.html
http://biz.yahoo.com/nytimes/080120/1194738421055.html?.v=4
http://www.nytimes.com/2008/01/16/business/16econ.html?scp=3&sq=recession+Federal+Reserve+
http://www.themoneytimes.com/articles/20080112/a_golden_voice_cries_out_recession-id-1015753.html
http://www.nytimes.com/2007/12/16/opinion/16roach.html
http://www.cepr.net/documents/publications/JSDB_08recession.pdf