There's been a lot of talk lately about whether or not the country is in a recession. While some of this debate is interesting, it has regrettably come down to the typical line of "Democrats want to talk badly about the economy in an election year while Republicans are the eternal optimists who love their country" line of thinking. All of this has (as intended) seriously contaminated the debate. So, let's try and sweep away all of the dust that has risen from this endless spin we call political dialog and look at the facts.
First, there are several definitions of recession floating around. The first is: "generally associated with a decline in a country's real gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year." Let's focus on this definition for a minute to see how it applies to the current situation.
According to the Bureau of Economic Analysis the US grew at a .6% annual rate in the fourth quarter of 2007 and the first quarter of 2008. So while the "two quarters" method indicates the US is not in a recession technically, we're still not doing that well.
However, there is a big problem with this number and that is inflation. When calculating GDP we have to know how much of the growth was due to price increases and how much was due to actual growth. This is where the GDP price deflator comes in. This is simply a specific inflation rate calculated solely for US GDP. According to the BEA, the GDP price deflator was 3.7% in the fourth quarter of 2007 and 3.5% in the first quarter of 2008. There's been a tremendous amount of debate among economists about whether or not the US correctly calculates inflation or whether we deliberately understate this number. There is a lot of evidence to suggest the number is understated. For example, consider this chart which is of the commodities research board -- an overall chart of commodities' prices:
Note that prices have increased about 30% since the beginning of the fourth quarter of 2007.
Also note this chart of oil:
Prices have increased about 56% since the beginning of the fourth quarter of 2007.
In other words, there are a lot of strong pricing pressures that indicate a 3.7% inflation rate may be too low.
In addition, here is a chart from Shadow Statistics, which computes US economic numbers the way they use to be calculated to show how the measure has changed. Note this is for CPI -- and not the GDP price deflator. However, it is illustrative of how measurement has changed to state a lower rate of inflation:
Finally regarding CPI, I would point people to the work of Kevin Phillips who has written extensively about how US economic statistics are, well, wrong in a big way.
It's also important to note that recessions can begin with a positive GDP quarter. Barry Ritholtz over at the Big Picture noted, "Of the 11 post WWII recessions, 4 started with positive numbers, two were flattish."
So here's the point with the "two quarters of negative growth" argument. It assumes that inflation is correctly calculated -- or is not deliberately under-reported. There is a strong body of evidence indicating inflation is under-reported for a variety of reasons. In addition, even assuming inflation is correctly calculated, it does not mean we are out of the woods by any stretch of the imagination because a little under half of all post WWII recessions started with positive or flattish growth.
Now, let's move on to a more complete definition of recession:
The National Bureau of Economic Research's (NBER) Business Cycle Dating Committee ultimately decides whether the economy has fallen into a recession. The NBER does not use any specific methodology for determining the start and end dates of a recession - instead it looks at a variety of economic indicators over various time periods and determines whether to declare that the economy is in a recession based on that data.
Let's look at what the NBER -- the organization what dates recessions -- has to say:
In choosing the dates of business-cycle turning points, the committee follows standard procedures to assure continuity in the chronology. Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA's real GDP estimates are only available quarterly. For this reason, the committee refers to a variety of monthly indicators to determine the months of peaks and troughs.
The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.
Let's see what the above mentioned statistics say.
While I do not have real income less transfer payments, I do have access to a chart of real personal income's year over year growth rate.
And year over year job growth has been dropping for some time:
And unemployment has been ticking up since April 2007
Industrial production has been dropping since the end of the third quarter 2007
And capacity utilization has been dropping since the beginning of the fourth quarter of last year as well:
The durable goods orders year-over year changes haven't been doing that well for some time:
The ISM manufacturing number has been in contraction territory (below 50) for the last few months.
So -- using the NBER's more detailed methodology, we get an economy that is probably in a recession. Or as summed up by Merrill Lynch's chief economist David Rosenberg:
In our view, the folks that are relying on the "plus" sign in front of that first quarter 0.6% GDP number as a sign that we dodged the recession bullet, we believe, are not correctly interpreting the data.
What the National Bureau of Economic Research (NBER) monitors to date the recessions are (i) employment; (ii) real personal income less transfer receipts; (iii) industrial production; and (iv), real manufacturing and trade sales. Employment peaked in December/07. Real income peaked in September/07. Production peaked in January/08. Real sales peaked in October/07. So, it is still reasonable to believe that the recession started some time between September and January.
The bottom possible read on the above data is we're in serious trouble.