Tuesday, April 29, 2008

The Economy by Any Other Name......

So—Are we or are we not in a recession? Like many issues having to do with anything financial, it depends on whom you ask.

Our President says we are not in a recession. Times are hard, but…(The less said about that and the rather discomfiting news conference earlier today, the better. ) Many economists think we are, indeed, in a recession and at least one financier went so far as to allude to “depression.”

Why can’t anyone agree whether we are in a recession?

As respected economist Bernard Baumohl, Managing Director of The Economic Outlook Group, based in Princeton, NJ, explained, “The main reason you are not going to get any agreement whether we are in a recession right now is that none of the pundits can officially declare it. The group that formally declares whether the economy is in a recession is a group of academic economists who are part of a non partisan organization called the National Bureau of Economic Research based in Cambridge, Mass. Led by Martin Feldstein, they might get together at the earliest in the Fall, more likely at the very end of the year when all of the economic data has been revised and updated. They will then look back at what happened from the end of 2007 and what took place in 2008 and make an official declaration as to whether economic activity in fact contracted. They are the official arbiters—the referees on the economy.”

But can a recession be determined only after it has ended?

Baumohl believes that “employment numbers are bad enough to suggest that we are in a recession. We now have at least three months of net job losses from payroll numbers so far this year. The payroll numbers include government hiring, which I don’t like to include because the government doesn’t really care about profit and losses—they’ll hire whenever they need to hire people—so I take a look at the part of the jobs report that focuses only on hiring and firing in the business sector. That’s one of the more important economic indicators for me. The others that are critical are industrial production (and if that’s shrinking, that’s certainly an indicator), consumer spending and housing. So there are a lot of things we need to consider. I know the common definition people use to define a recession these days is 2 consecutive quarters of negative growth. But that’s one of those ‘finger in the wind’ definitions.

The recession, in my opinion, most likely began in December, and will probably last through the second quarter. That’s based on the economic evidence we are getting. Having said that, on Wed., April 30, we will get the first quarter GDP. That’s the first set of numbers for 2008. So we’ll see right then and there whether there’s negative growth.”

How would Baumohl sum up things right now?

“I think there are just enough economic indicators to tell me that this economy is in real jeopardy and there’s probably a recession underway right now. It certainly feels like a recession regardless whether it is one technically or not. Most people are not going to be able to tell whether we are in a recession or not. It still is going to feel awful for most Americans if the economy grows by 1% or whether it shrinks by 1%. It’s going to feel essentially the same.”

In other words, a recession by any other name would be very painful.


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