01/04/2009 05:12 am ET Updated Dec 06, 2017

An Overview of the Recession

From the WSJ:

The U.S. economy has been in recession for about a year, according to the research organization that tracks economic cycles.

In a statement, the National Bureau of Economic Research said its Business Cycle Dating Committee determined that the U.S. entered recession in December 2007, marking the end of the economic expansion that began in November 2001. That month marked the end of the last recession for the U.S. economy.

It's official. The National Bureau of Economic Research formally announced the US has been in a recession since December 2007. However, it is the Federal Reserve's Beige Book released yesterday which gives us a very detailed look at the breadth of the problems the economy faces. Let's see what the report's overview says:

Overall economic activity weakened across all Federal Reserve Districts since the last report. Districts generally reported decreases in retail sales, and vehicle sales were down significantly in most Districts. Tourism spending was subdued in a number of Districts. Reports on the service sector were generally negative. Manufacturing activity declined in most Districts, and new orders were soft. Nearly all Districts reported weak housing markets characterized by reduced selling prices and low, but stable, sales activity. Commercial real estate markets declined in most Districts. Lending contracted, with many Districts reporting reductions in residential, commercial and industrial lending and tightening lending standards. Agricultural conditions were mixed with a relatively good harvest but concerns about profitability. Mining and energy production and exploration started to soften due to lower output prices.
District reports generally described labor market conditions as weakening. Wage pressures were largely subdued. District reports characterized price pressures as easing in light of some decreases in retail prices and declines in input prices, particularly energy, fuel, and many raw materials and food products.

There is nothing good in that paragraph. Retail sales were down "significantly"; manufacturing activity declined in "most districts"; housing markets are still in terrible shape, lending contracted ... you get the idea. Let's take this information apart piece by piece to see exactly what is going on.

Consumer spending weakened during the reporting period. Retail sales were described as weak or down in the New York, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas and San Francisco Districts. In Kansas City, consumer spending slowed sharply.

Here is a chart showing the year over year percentage change in personal consumption expenditures:

Retail sales aren't much better:

Basically, consumers have been slowing down their spending for a year. That is a very important trend. And it's no wonder -- a little over a year ago consumer confidence started to drop:

Remember -- the credit crunch started in July/August 2007. Also remember the financial markets started to drop about that time which created a second asset class that was losing value (the first being real estate). When the two primary sources of personal wealth start to drop, consumers stop spending.

Activity in the services sector generally contracted in most Districts since the last report. New York, Richmond, Chicago, Minneapolis, Dallas and San Francisco reported deteriorating conditions. Most of these Districts were seeing weakness across a wide range of services, including advertising, architecture, business support, information technology, legal services and temporary help firms.

This shouldn't be a surprise either -- considering the latest release:

Business conditions are deteriorating quickly, the latest indication from the ISM's non-manufacturing report that showed wide declines across readings. The headline composite index fell more than 7 points to 37.3 with new orders, perhaps the most important index of all, falling more than 8 points to 35.4. The business activity index, equivalent to a production index, fell more than 11 points to 33.0. The employment index fell more than 10 points to 31.3 with backlogs down nearly 5 points to 39.5. Prices paid, as it did in the ISM manufacturing report, confirms the extent of the weakness, down nearly 15 points to 36.6 in a drop reflecting declining demand for goods and services including declining demand for energy. Many of the readings in this report, as well as month-to-month changes, are record lows. Stocks dipped and money moved into Treasuries in immediate reaction to the results.

Manufacturing is also suffering:

Manufacturing activity declined noticeably since the last report. All 12 Districts reported weaker manufacturing conditions, to varying extents. Boston, Philadelphia, Cleveland, Richmond and Kansas City reported reductions in orders. Almost all Districts noted reductions in exports. Philadelphia, Cleveland, Richmond, Chicago and Atlanta reported lower shipping volumes. Dallas reported weakness in most forms of transportation. Nearly every District reported decreased demand for construction materials; Cleveland and Chicago noted, in particular, decreased steel production. Several Districts reported multiple plant shut-downs, and expectations for capital expenditure were down.

The ISM manufacturing index has been dropping for the last 4 years:

Industrial production has fallen off a cliff:

And capacity utilization has dropped, indicating we're using less and less of out productive capacities:

Real estate is still a huge problem:

Residential real estate continued at a slow pace nationwide. Sales were down in most Districts, but mixed activity was noted in the Boston, Atlanta and Minneapolis Districts. Boston, New York, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City and Dallas noted decreases in housing prices. Inventories of unsold homes remained high in the New York, Atlanta, Kansas City and San Francisco Districts, but declined in Chicago and Minneapolis. Philadelphia, Richmond, Chicago and Kansas City reported relatively stronger demand for lower- and middle-priced "starter homes."

Here's the central problem. Inventory is still at incredibly high levels (thanks to Calculated Risk for the graph):

Lending standards are tightening:

Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 70 percent of domestic respondents--down from about 75 percent in the previous survey--indicated that they had tightened their lending standards on prime mortgages.2 Responses differed somewhat by bank size, with about 80 percent of the largest banks, but only 55 percent of the smaller banks, reporting tighter standards for prime borrowers. About 90 percent--up slightly from July--of the 29 banks that originated nontraditional residential mortgage loans reported having tightened their lending standards on such loans.3

As a result, home prices are dropping:

The decline in the S&P/Case-Shiller U.S. National Home Price Index -which covers all nine U.S. census divisions - remained in double digits, posting a record 16.6% decline in the third quarter of 2008 versus the third quarter of 2007. This has increased from the annual declines of 15.1% and 14.0%, reported for the 2nd and 1st quarters of the yer, respectively.

Finally there is employment, which has been dropping for over a year on a year over year comparison:

As a result, the unemployment rate has been increasing for over a year:

So -- we're clearly in a recession. However, remember that a lot of people are on the case (as it were). While I have personally made fun of everybody involved, I have the luxury of doing so. Bernanke has been given the most unenviable task of cleaning up one of the largest financial messes in history. While he is struggling with the task -- he's supposed to be considering the size of the problem. I have disagreements with Paulson, but it's not as though I think he's incapable. Frankly, I think there are times when he is just as perplexed as the rest of us at times.

And for everybody out there who is saying "there is no organized central plan to this problem" -- there isn't one available. There is no book out there that says, "this is how you undo years of financial damage in 3 easy steps." It just doesn't exist. There are a lot of armchair economists out there saying this is a bad idea or that is a bad idea. What these people are forgetting is the previously made point -- no one has a clear plan on what to do because one doesn't exist. It's that simple.

The point of the previous two paragraphs is to point out that we are in clearly uncharted waters in a big way. There are no rules that apply -- we're trying to figure this thing out as we go along. Also remember that no one in the incoming administration has a crystal ball either. While there are a lot of very smart and capable people out there, they don't have the magical "how to fix this crisis in three easy steps" book either. In other words -- it's going to be a long and difficult road going forward.