No one wants to say the recession is over. It would be bad luck. The minute a prominent economist or the head of the Fed or Treasury Secretary calls an end to the downturn, some new piece of data will prove the claim to be wrong. That would make someone look like a fool. That fear of foolishness will allow the notion that the economy is coming out of a recession to persist for several months or even several quarters. The organization that determines whether the economy is officially in a downturn, the National Bureau of Economic Research, will not have the data to determine whether the recession is over until it can look at more than one quarter of GDP data. The NBER defines a recession as “a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.” It will take almost forever for the NBER to gather the information necessary to declare a formal end to the current recession.
The data collection problem leaves economists and government officials with only the tools of deduction to tell them if GDP has begun to move up again and whether the improvement can be sustained. Durable goods and housing data have been encouraging. The Fed Beige Book data was positive but inconclusive. The reports from the twelve Fed regional banks, according to the agency, “indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level.”
President Obama is hinting, and hinting strongly, that he believes that the recession has come close to running its course. The president, like everyone else, is relying on data from the past, so he is bound to be cautious. He commented at a public meeting in North Carolina that “we may be seeing the beginning of the end of the recession.” He has probably been getting advice from economists who predict that the downturn will end this quarter and that the fourth quarter should show extremely modest growth.
There is enough data in at this point to say with a reasonable amount of authority that the economy bottomed this summer and that this recession is over. The question that the government and experts face is whether the recovery will last for several years or only several months. There is a powerful argument to be made that a new downturn could begin before the middle of 2010. Unemployment would be the cause of another downward spiral and the government figures for July, August, and September will be an excellent barometer of whether the recovery will be and can be sustained. A sharply slowing pace of job cuts should give the $787 billion stimulus package time to take hold and begin to create new jobs and capital spending. Job losses of 500,000 or more in each of the three months will take unemployment well above 10% and indicate that businesses are still facing slow sales and poor access to credit, factors that would be strong enough to keep them from hiring. The most cash-starved businesses and those under shareholder pressure to perform well will continue to fire people until they have no practical way to operate with less staff. It was almost lost in the Yahoo! (YHOO) news when Microsoft’s (MSFT) CFO said, referring to cost cuts at the world’s largest software company, “This is not a crash diet where you stop eating for a couple of quarters — this is a new diet regime where you slim down and stay slim.” Microsoft can obviously afford to spend money that almost no other firm in the world can and even it is not talking like a company that plans to add a lot of new employees.
Banks are lending and even though the lending is modest, it is not like the fourth quarter of last year when the credit markets were completely locked up. Businesses can raise money now, if they are viewed as viable even if the economy is slow for another year. These companies may have to pay relatively high interest rates, but there is a growing market for corporate debt. That market will be damaged if banks begin to do very badly again due to commercial real estate and consumer debt write-offs. The banking system could go into a crisis again, not as bad as the crisis of eight months ago, but bad enough to cut off any reasonable amount of lending.
Now that the recession is over, analysts and the government can watch bank earnings and unemployment statistics. There are a lot of other figures that experts can hope will be better than expected, numbers that economists can examine for clues. But, each time a job is lost or a bank turns down a worthy request a loan, the next recession gets closer at hand.
Douglas A. McIntre