Yes It Is a Recession; No, It Won't End Soon

Anyone who is currently arguing that we are not in a recession is simply proving how little they know about economics. The underlying facts and figures are clearly pointing otherwise.

There is one measure that the "there is no recession" (or as Barry Ritholtz calls them the Pervasive Pollyannas of Prosperity or PPP) crowd points to: we have not have two consecutive quarters of negative GDP growth. Therefore, we're not in a recession. The official organization that dates recessions (the NBER) answers that observation thusly:

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

In other words, using one statistic to describe a system as complex as the US economy is pointless. What we're really looking for is a fairly widespread decline in activity that lasts a fairly long time. To that end, the NEBR uses the following criteria

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, we refer 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.

Why are these particular indicators important? Let's look at each one in detail.

1.) Personal income tells us if there is wage pressure in the economy. Wage pressure occurs at full employment which is a sign of an economic expansion. When unemployment is low, people can go to their boss and say, "I want a raise, and you'll give me one because you can't find a replacement for me that will work at a lower rate." A lack of wage pressure indicates there is slack in the labor market, which in turn tells us we're not at full employment, which in turn tells us things might not be that good.

Transfer payments are the eco-geeks way of saying "government assistance." In other words, the stimulus checks that went out over the last few months don't count. All that being said, here is a chart from Econoday of personal income's year over year change:

But, remember -- that nice big jump doesn't count (The same thing happened a few years ago when Microsoft declared a special dividend). As Marketwatch noted:

Personal incomes rose 1.9% in May, the largest gain since September 2005, when insurance payments from hurricane damage flooded into bank accounts. The increase was close to the 1.5% gain expected by economists surveyed by MarketWatch.

Real disposable incomes (after taxes and adjusted for inflation) increased 5.3%, the biggest increase since 1975, when the government also sent out rebate checks.

Excluding the impact of the rebates and inflation, real disposable incomes were flat.

In other words, without government help, incomes didn't increase at all thanks to the stimulus checks. That tells us there is no wage pressure, indicating we're nowhere near full employment.

Now let's look at personal consumption expenditures (adjusted for inflation) to see how healthy consumers feel.

That charts tells us one thing. Consumers have not been feeling healthy about spending since the end of last summer. In fact, they have continually decreased their consumption expenditures over the last year. That is a very negative sign, especially for an economy that is dependent on consumer spending for 70% of its growth.

2.) Employment growth tells us if business is feeling healthy or not. If business sees blue skies on the horizon they add employees. If business sees storms, they "downsize" (or fire people).

To that end, business sees a lot of storms ahead.

The year over year rate of job growth has been dropping for the last two years. In addition:

The unemployment rate has been increasing for a year and a half. That is definitely a very bad development.

But there are deeper issues in the employment report which are highlighted very nicely in a recent article by Chris Puplava. He writes at a website called Financial Sense.

The chart above places the year over year change in employment in long-term perspective. The point is clear: every other time the year over year chart has been at current levels, the US economy has been in a recession.

The chart above shows the number of people who have had their employment hours cut back involuntarily. In other words, the business where they work is decreasing the number of hours each person works. Again note that when this statistic was at similar levels in 1980 and 1990, the country was in a recession.

The chart above shows that the number of people who thing jobs are hard to get is increasing at a quick pace. That is helping to lower consumer sentiment and confidence, which in turn is lowering personal consumption expenditures.

So on the employment front we are clearly in a downtrend. Several important indicators are at levels usually seen during recessions.

3.) I explained the current situation regarding industrial production in this article. None of the indicators has changed sign I wrote that article. The short summation is this: national industrial production has been decreasing since the last quarter of 2007. Capacity utilization is decreasing, indicating we're using less of our manufacturing capability, and several regional indexes are showing contraction.

Regarding the manufacturing sector, there is a new development that is troubling. Exports have been one bright spot of the current economic situation. However, several regions of the world are now reporting a slowdown:

Singapore cut its 2008 growth forecast for a second time this year, joining its Asian neighbors in signaling a deeper slowdown.

The island's economy will expand between 4 percent and 5 percent, from an earlier estimate of 4 percent to 6 percent, Prime Minister Lee Hsien Loong said yesterday. Growth was 7.7 percent in 2007.

.....

Governments from South Korea to Thailand have lowered their 2008 growth forecasts since the start of this year as the impact of the U.S. slowdown spreads and soaring oil and food prices hurt spending.

Japan's government this week said the world's second- biggest economy is ``weakening'' for the first time since 2001. Gross domestic product in Japan probably shrank an annualized 2.3 percent in the three months ended June 30, according to a Bloomberg News survey.

.....

In China, economic growth slowed for a fourth straight quarter in the three months to June 30, expanding 10.1 percent. Growth below 9 percent would be ``unacceptable'' for a government targeting 10 million new jobs a year, Credit Suisse Group said this month.

South Korea's finance ministry on Aug. 7 said growth in Asia's fourth-largest economy is easing as consumer spending slows and higher fuel costs stoke inflation. An expansion of 4.8 percent last quarter was the weakest annual pace since the start of 2007.

While some of these growth rates are still strong, they are weakening. In other words, the PPP's arguments about "decoupling" (meaning the US can slowdown and the rest of the world can continue to grow at high rates) is bunk. But the problems aren't just in Asia:

Europe's economy will grow 1.2 percent next year, with growth in Germany, the largest of the 15 nations that share the currency, slowing to 1 percent from 2 percent this year, according to the International Monetary Fund.

Italy's economy unexpectedly shrank in the second quarter, edging it closer to a fourth recession in a decade as households and businesses struggle to cope with more expensive oil.

The economy, the fourth-largest in Europe, contracted 0.3 percent after expanding 0.5 percent in the first quarter, the Rome-based statistics office Istat said yesterday. Economists expected stagnation, according to the median of 22 forecasts in a Bloomberg News survey. From the same period a year earlier, the economy didn't grow at all.

Europe is also slowing down.

So -- two regions of the world that have been important US exports are now seeing lower growth. This will slow the rate of growth in US export sales, which in turn will hurt overall US GDP growth.

Now -- I haven't even mentioned the continuing problems in the credit market or the continuing fallout from the housing market which is still nowhere near a bottom. Neither of these two areas of the economy are helping growth. In fact, both are adding to the problems.

So, according to the NBER's far broader measure of economic activity we have the following facts:

1.) Personal incomes adjusted for inflation and not including the transfer payments are decreasing

2.) The year over year percentage change in job growth has been decreasing for several years, every time the year over year number has been at current levels over the last 50 years the economy has been in a recession, the unemployment rate has been increasing for a year and a half, and the number of people who are involuntarily working fewer hours are increasing.

3.) Industrial production has been decreasing for the last 9 months, capacity utilization is decreasing and several regional manufacturing indicators are at recessionary levels.

4.) Two important export markets -- Asia and Europe -- are experiencing slower growth. This will negatively impact US exports which have been one of the only bright spots over the last year or so.

5.) We haven't even discussed the continual deterioration in the financial or housing sector.

The conclusion is clear: we're in a recession and have been for a bit.

Comments

[kaski]

There need be no recessions, depessions, inflation nor deflation if "We the People" demand that Congress overturn the 1913 law that created the privately owned Federal Reserve. It is owned by about 12 American families, the Rockefellers, Morgans, Warburgs... These families also own the largest banks in America. They loan our government monies charged with interest. They operate on Greed, Power, Control, and developing fear and paranoia in America and the world. This is the biggest crisis facing America and the world today and they must be exposed to "We the People", and they will lose their control over us and our government. Congress legally are the only ones to print, issue, create and loan monies interest free in America. Our forefathers knew about the dangers of having a privately owned banking institution loaning monies with interest to our government. Lincoln knew it and JFK knew it, and they both tried to abolish them and make our government and citizens free from their stragulating tenticles.

"The Government should create, issue and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the tax payers will be saved immense sums of interest. Money will cease to be the master and become the servant of humanity." Abraham Lincoln



"The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed it's inhabitants under burdens ever accumulating." Thomas Jefferson

[Oldtimer]

It's generally accepted that things have turned bad in America but I wonder if Bush and Cheney
and the neo-cons are being honest about our current economic state. Given the breadth of their
dishonesty leading up to the Iraq invasion I have to conclude that Bush and Cheney are keeping
the real bad news off the front page until after the election.
I recall a better time not long ago when Americans realized they won the Cold War
and a "peace dividend" was expected. As the only super power left standing we were told about
a "New world order". Military bases were being closed. The defense budget was actually shrinking.
Those days are long gone now. Ninteen hijackers with box cutters and a defense dept. anthrax technician provided the neocons all the scare tactics needed to bully dissent and steer the lemmings
of America off a cliff. Today America is squandering trillions of dollars on defense while China and
India focus on competing with the West. Americans are losing the war on trade while the neocons
create a distractioin - the War on "Terror". This American is terrified of India and China.
I'm not terrified of Iraq or even Iran. We need a new foreign policy that tones down the false terror
and focuses on the real teror.

[themodernleader]

Blindhog, A Country is no stronger than its smallest unit, that is, the family. You poignantly expose the fallacy of consuming without producing. Go to any American city and you will see listless, aimless, bored citizens consisting of mostly young people full of fear as urban warfare rages. The stench of corruption, poverty, decline and decay are everywhere.
Go to any American rural community. Listen to the conversation of the constant break-ins and thievery everywhere. There is an universial unease of a society coming unwound.
DuganS1. Look at the trend of industrial decline since 1980, even as our population has burgeoned. Also. our trade deficit is mortally out of balance and has been for so long that it has permanently damaged our economic well being as a nation. Also, 3 billion people live on less than 2 dollars a day, so I have discerned from a U. N. Report. Also, be distrustful of our government's periodical reports. Political considerations, beginning with Reagan, confound empirical data. This fact hve lulled Americans into believing on the basis of bogus government statistics that America is basically, fundamentally sound as an financial and economic organization. Misleading the ordinary citizen is the mark of moral corruption in the quest for political and economic power.

[blindhog]

There's an old riddle that goes something like this, for want of a nail a shoe was lost, for want of a shoe a horse was lost, for want of a horse a man was lost, for want of a man a battle was lost, for want of a battle the war was lost. I'm not sure what stage the United States in , but like the riddle we have to realize that damage to those at the bottom, particularly those in the lower middle class who have lost their high paying manufacturing jobs to Mexico and China, has an effect on those higher and supposedly "more important". Just like in the food chain, each link keeps the chain viable.

[Nofuzzydreams]

July industrial production increased, trade deficits are lower though still too high, exports are surging to record and dollar is improving. The unemployment rate is still very low compared to the norm during earlier decades. Housing's excesses are being corrected rapidly. We will be fine and the doomsayers predictions will be in the dustbin. But then again, doomsayers who predicted widespread world hunger in 3 decades back in the 60's (More people in the world have food on their table today than in the 60's - no official data needed just consider populations of India and China) are still trotting around new doom theories which have just one fundamental problem - they fail to account for the power of innovation.

[DuganS1]

Although industrial production has been trending downward, it's only been slight and it's still mostly up year over year. Non-residential construction, particularly commercial, also remains strong and is up year over year, although that has started to weaken. Imports are also not growing and in a month or two has contracted, which adds to GDP. Like you said, exports are up significantly and the very strong June numbers that came out the other day mean that Q2 gdp will be revised upward, probably from 1.9 to 3.0. Residential construction is becoming a smaller drag on gdp as it's measured year over year. It should stop being a drag at all by Q1 of next year. Last inventories are very very low and a simple quarter or two of inventory build could add a point to gdp and keep us "officially" out of a recession.

[themodernleader]

Dolphy. Olephart is right. We do not have an alternative for the foreseeable future to replace oil for making or moving things or heating our shelters of our modern age. Solar, wind, nuclear and other sources of energy could put a big dent into our licentious use of oil and natural gas. Now, a crash program to develop the most advanced nuclear plants to create energy to fuel energy cells for technologically advanced automobiles, trucks and trains would seem only reasonable.
The quality and living standard of a people is tied to the number of btu's it uses. Don't let fear mongers persuade you that we must live with reduced energy unless you hanker for a return to famine, poverty, pestilence and a society of a few haves and a multitude of indentured servants.

[dolphy]

olephart See Profile I'm a Fan of olephart I'm a fan of this user

"unless someone comes up with a new technology to replace our dependency on fossil fuels"

The technology exists today in wind and solar. The Republicans have blocked the renewal of the tax credits required at this time to implement them. They are holding the Nation hostage to their Big Oil masters for offshore drilling. Our military adventures in the Middle East for the past 20 years have in effect subsidized the oil from there by offering protection. Thus the Republican policies have been to keep us addicted to Middle Eastern oil while turning a profit for both the oil and defense industries.

Yes, people don't realize that the price of propping up our military/industrial complex has to be added to the price of oil as well as the lowering of the quality of life due to pollution caused by the extraction and use of fossil fuels. Has anyone quantified these added costs?

[themodernleader]

Joebhed. If I understand your writing, you also mean that the present unpayable debt must go into default instead of being bailed out by our government's currency that being dangerously dilluted.. if this mad and self-interested policy is carried out to "save" Fannie Mae, Freddie Mac, the despicable banks and brokerage houses and savings and loans; the savings of responsible Americans will be wiped out as was the middle class wealth of the Weimar Republic. Continuing the Administration's present policy of saving organizations too big to fail will break our American Republic which is too big to fail.

[leduck]

yep....
of course we're in a recession

the era of cheap energy is over

[Chavez08]

The foreclosure, unemployment, economic conscription was all planned, it was intentional though Americans refused to believe it.

Cheney and Bush call this a "market correction". They told you, up front, they were destroying the middle class though everyone thought they'd be included in the winners circle. Everyone thought that THEY are certainly part of the "natural selection" that will win and the rest of the other 98%, "too bad, so sad"

Now the yuppies, those who were turning their noses when the manufacturing workers were being targeted by unchecked Capitalism are realizing THEY are part of the 98%.

The college educated mom/housewife, the middle manager, the sales rep, the plumber, executive, carpenter, car salesman, cop, geek, independent store owner - you're ALL excluded from the "natural selection". I'm not sure you've read the memo.

[nanny138]

Great piece! The risk of "redifining" recession is huge... Related post from some business cycle experts that concur here:
http://money.cnn.com/2008/05/05/news/economy/recession/

[joebhed]

Sorry, Bondad
We haven't yet met the enemy.
Paraphrasing a 1995 ($) speech by Muriel Mabley to fit here:

"If we divide the total money of the nation by the total population we conclude that there is about $21,500 for each person. Unfortunately, there is about $58,000 of debt for every person. Apply your $21,500 to the debt and $37,500(6) of debt would remain.
Your options are forfeiture of assets or borrow more money. Can you borrow yourself out of debt? You cannot!

Working harder or longer will not correct it.
Having a job for everyone will not correct it.
Neither raising nor lowering wages will correct it.
Neither greater nor lesser utilization of natural resources will correct it.
Neither increasing nor decreasing exports will correct it.
Neither more nor less spending will correct it.
Neither full employment nor less than full employment will correct it.
Changing interest rates will not correct it.
Changing tax rates will not correct it.

The only thing that will correct it is the one thing that is a sacrosanct non-subject in media, education, politics, religion, and even social discourse. The only thing that will correct it is to strip banks of their power to create their money as debt at interest and adopt a method of money creation whereby the U. S. Treasury creates our money as CREDIT!

This issue is the key issue in the financial future of our nation and world!"

[themodernleader]

Bondad, you bring light where there was darkness. Olephart, you need to be at the side of the next President to assure that he operates on valid information.
i read some critic's prediction that the next andnew bubble would be related to renewable energy and climate change. I believe there will not be a next bubble. We are all bubbled out. There is only the Gods of Economic Law to pay. Which means "times that try men's souls" and measures whether we are as able and wise as our forebears.

[outnow]

Many people play the market for a living. What does that actually produce? Trading currencies, taking short positions, and corporate looting are evils, not the benefits of a capitalistic system. Adam Smith represented a class of imperialist traders. Those well-financed globalists finally lost their empire.Trade is not the panacea for all ills. A country must manufacture and grow food and develop its resources. Have we run out of resources or land? Why must we follow the example of the British Empire and institute a system of neocolonialism. If we "must," then America is spiritually as well a economically bankrupt. Empires cannot be free themselves. Just as slavery is bondage for the master, making Americans insecure wage slaves is not the answer. The "symptom" of an increasing gap between the rich and poor is the most reliable indicator of true freedom or lack thereof in a society because the mega-bucks control the po9liticians who in turn control the policies of the government for their own benefit.

Yes, we are in a recession with stagflation. We are in debt and heading for more wars. That is the price of empire.

[Chavez08]

Some will choose slavery, some will choose freedom and there will be a cost for both. Our notions of "good" and "bad", right or wrong, "freedom", what is "criminal", what is "terrorism", morality, existence and every behavioral trait, every thought we've been spoon-fed are going to be put to the test in the coming decades in the name of survival.

Because we Americans refuse to learn from (or even learn about) history.