What Recession?

April 30, 2008

Economists have earned a reputation for calling U.S. recessions only after a downturn is well under way and, oftentimes, close to its end. Determined not to reinforce that perception, private and public-sector analysts began using the R-word frequently at the first hint of significant trouble. Even foreign officials have jumped on the recession bandwagon. The R-word has been said so much in fact that many analysts have convinced themselves that a recession started at the turn of this year, if not earlier.

The National Bureau of Economic Research is charged with responsibility for deciding the months when cyclical peaks and troughs in the U.S. business cycles occur. The time between a peak and a trough identifies a recession. The NBER makes such pronouncements well after the fact to be sure it gets the timing right. Real GDP growth is only one of several criteria for determining what has constituted a recession, so the lay-person’s quick-and-dirty designation of a recession as two straight quarters of falling GDP lacks sufficent precision for a definitive diagnosis. Nevertheless, it’s a pretty reliable guide. Among the eight recessions during the past fifty years, six had consecutive quarters in which real GDP contracted. Ironically, the last recession at the start of the current decade was one of the exceptions, although GDP did slide in three out of a sequence of five straight quarters. The other exception happened early in the 1960’s when two quarterly contractions sandwiched a quarter of expansion. The mild recession in the early 1990’s had just two consecutive quarters of negative growth surrounded by nothing but quarters with rising GDP. Two recessions in the early 1980’s occurred in rapid succession. The first also had just two quarters of negative growth. In the much longer second of these downturns, real GDP fell in a sequence of four out of six quarters including two in a row. The only instance from the last 50 years when real GDP dropped in three consecutive quarters happened in the early 1970’s, a recession triggered by the first oil price shock. Over the space of seven quarters, there were five in that recession when GDP contracted. In 1957-8, there was a recession overlapping four quarters, three of which with negative GDP growth.

Want to know a secret? We haven’t yet had a quarter with negative growth in the current cycle. Real GDP fell by 0.6% at seasonally adjusted annualized rates in both 4Q07 and 1Q08. That’s stalling speed to be sure, but a best guess for the second quarter of this year with two-thirds of the period lying still ahead puts growth this spring around the same speed as in the past two quarters rather than in the red. Remember, tax rebates will arrive in May-June.

The pathology of a recession in this cycle has the residential housing meltdown infecting personal consumption and then spreading to business capital spending. Two factors have kept growth in the black. While non-residential investment turned negative for the first time in ten quarters in 1Q08, private consumption advanced at a 1.0% annualized rate and by 1.9% from 1Q07. Moreover, net exports, government spending, and business inventories each made positive contributions to economic growth. Comparisons between the first quarters of 2007 and 2008 were not too shabby: Real GDP +2.5%, non-residential investment +5.8%, and expports +9.5% versus import volume growth of only 0.7%. Rounding out the components of aggregate demand in the economy, public spending went up 2.9% from a year before, and private consumption grew by 1.9%.

The possibility of a recession remains strong, and it may have started already, since data arrive with a lag. But it hasn’t been going on for many months as some would have us believe, and so far it is mostly confined to housing, which plummeted 26.7% at an annual rate last quarter and by 21.2% from 1Q07. I believe that a recession will not be avoided in 2008, but am not completedly convinced of that near-univeral view. It is not at all clear that the United States faces a catastrophe like the Great Depression, Japan’s decade-plus malaise or the U.S. recessions of 1981-2 and 1973-5.


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