Friday, March 14, 2008

Are We in a Recession?

The honest answer is that we cannot provide an answer in real time.

The rule of thumb is that a recession is two or more consecutive quarters of negative growth in real GDP. The latest estimate of 4th quarter GDP was 0.6%. Not negative, but certainly not great. So to say that we are in a recession, according to this rule of thumb, is to say that we have knowledge that the current quarter's growth rate is negative and either or both of the following:

  1. 4th quarter GDP growth from 2007 will be revised below zero when the next estimate is released on March 27.
  2. 2nd quarter GDP growth from 2008 will be negative.

I don't see how anyone could be sure of this. The starting point for 2nd quarter GDP itself is not known and will not be officially estimated in advance form until late April. There is already considerable monetary and fiscal stimulus in the pipeline that will begin to have an impact over the second quarter.

Then NBER has a broader defintion of a recession than the rule of thumb:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion.

So to assert that we are in a recession is a claim that a peak has occurred, that the subsequent decline is significant, that the decline will last more than a few months, and that the decline will be evident in many if not all of the indicators listed in the definition. What do the indicators say?

  • The Real GDP growth has been positive thus far according to official estimates (as noted above).
  • Real personal income less current transfers, with data available through January, peaked in September 2007 (see Table 1 for income and transfers and Table 9 for the price deflator) but has fallen only 0.3% since then. We get February data on March 28.
  • Employment peaked in December 2007 and has fallen by less than 0.1% over the subsequent two months.
  • Industrial production fell from September to October 2007 and then rebounded to achieve the same index value in January as it had in September. We'll learn about the February value on Monday.
  • Wholesale-retail sales. Wholesale trade fell slightly between November and December but more than made up the decline in January. (February data are released on April 9.) Retail sales fell between January and February.

Each of these indicators seems to be some version of flat. It is premature to be making pronouncements like this these, from Congressman Frank and Senator Dodd:

“We are in a recession now that has an unusual cause. It is not your usual cyclical problem… This is a structurally caused recession,” Mr. Frank told reporters at a press conference. Mr. Dodd, also appearing at the press conference, had an even gloomier take.

“This is the worst housing crisis in our lifetime. We are in a recession. People want to talk about ‘Are we?’ — we’re in one. The question is: how deep is this going to go? How long lasting will it be? The underlying economic conditions in our country are not good for resolving this. Almost every other recession we can talk about lasted eight months. When you’ve got deficits running as high as they are — The value of the dollar… inflation going up, unemployment going up, these are not great underlying economic circumstances to respond to the situation.”

They are right that the present period is different from past recessions--first, because we cannot assert that it is a recession, and second, because we have already stretched our policy responses just about as far as they will go.


Anonymous said...

US faces severe recession: NBER's Feldstein

Hey, isn't NBER the group that calls recessions?

Lack of liquidity in credit markets is a huge problem. It was the catalyst for the Great Depression too. We already have deflation in housing market, big time where I am . .

Anonymous said...

Link again to Feldstein

Anonymous said...

There are two sides of the problem.
Real conclusion on the presence of any recession can be only made after a number of BEA revisions (some post-mortem study). I would guess that we will find something only in 5 to 10 years from now. In any case, one can discuss recession only in the framework of past estimates and revisons. To do this, one has to read BEA reports, at least.

Second side is related to monetary policy and investments. Some people drive their profits up, no way to resist except positive knowledge and reliable relationships. Unfortunately, conventional economics resists to accept any deterministic approach to the evolution of real economy.

Anonymous said...

Do you think gas prices will triple if we elect Obama or Clinton?

Anonymous said...

i might disagree with stretching policy responses as far as they will go.

A theme that seemed popular or resonant in US primaries was rebuilding or maintaining infrastructure in US - roads, bridges, levies, etc. The construction and real estate market has been hit hard lately. If we in the US had queued up projects in the pipeline two years ago, we would be ready to roll with some projects that are needed and that would have offset some of the slow down in construction and real estate. This may have made more sense that mailing checks to people.

Also, clean coal technology in Mattoon, IL, was recently put on hold by the fed govt in US. The reason was something like a need to do more feasibility studies, or learn more before proceeding with the project in order to manage costs and be effective. No offense to the current fed admin, but if more feasibility and studying were needed before proceeding, shouldn't the studies have been conducted years ago? We should have been ready to roll with some of this and we are not.

Bernanke in his testimony said the govt may have some role in basic research but not applied research, because there were enough market incentives to encourage the applied research. Hopefully I am not confusing this. Where does energy fit - is it basic research or applied research? Should the fed govt spend money on this, or would this be a waste?

Anonymous said...

"Do you think gas prices will triple if we elect Obama or Clinton?"

Gas prices tripled under Bush Jr.'s tenure, so yes, it's possible.

Anonymous said...

It is possible the price will triple again, but is it probable?

Given weakness of $ and other factors, i agree the price of gas could easily go higher.

ExxonMobil may have a DRIP plan (Dividend Reinvestment Plan) with low minimums - you can always take out some imperfect insurance on high gas prices.

Anonymous said...

There is one principal question about the current "recession", at least for the NBER. What would happen to the US economy and stock market between 2000 and 2003 if everybody knew that real GDP grew by 0.8% not dropped by 1.3%?

It was a very poor play by the NBER then they redefined the term recession. They lost their credibility to some extent.

Anonymous said...

Anyone care to comment on the role of mark-to-market in this mess?

This is looking a lot like Enron (the pioneers of MTM).

Deregulation -- repeal of Glass-Steagall, and removal of short on uptick rule (recently), etc. were huge mistakes. These were safeguards implemented after the depression . . . why were they removed?

Can Fed infusions stop the bleeding? The taxpayers have bailed out Bear Stearns but loss of confidence in the system is the biggest danger here today. If hedge funds line up to liquidate their holdings we'll have a virtual run on all the major banks . . . and more mark downs. This appears to be a downward spiral, and with each iteration credit seizes up even more. It looks eerily like 1930's scenario. And government looks to be moving to place more restrictions on lending . . . which would further exacerbate the problem.

Any thoughts on where this will all go? My own personal net worth is declining on a daily basis.

Anonymous said...

it is not loss of confidence - it is too much leverage in financial companies. mgrs have been buying growth and steamrolling people who point this out to people. baby boomers did not save enough for retirement and reached for yield in investments. the "conservative" assets are what people leveraged (borrowed against), so these assets (muni bonds, income investments) are coming under pressure as people sell them to pay off bills (debt).

no one knows the value of "assets" on balance sheets of financial companies. an asset is worth what someone is willing to pay for it. this changes daily. a balance sheet marked-to-market can change dramatically the day after it is published. some of these "assets" are new and no one knows what to pay for them.

an asset on a balance sheet that is not an asset is a big gigantic write-off waiting to happen - hit to earnings. if you already have lots of debt and you take hits to earnings (one-tiem write-offs and problems in recurring operations), you probably have to find cash somewhere (default on interest payments, cut employees, etc)

companies like IBM and Intel have good balance sheets. Others do not.