Tuesday, September 15, 2009

The End of the Official Recession?

by Bill McBride on 9/15/2009 02:32:00 PM

First, a nice mention in Newsweek (thank you): The Financial Meltdown in Words (see slide 4 for a quote from Feb 2005, ht Matthew, Eric)

On the end of the recession, from Bloomberg: Bernanke Says U.S. Recession ‘Very Likely’ Has Ended

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said today at the Brookings Institution in Washington, responding to questions after a speech.
Although I think the official recession has probably ended, it is worth remembering that one or two quarters of GDP growth doesn't necessarily mean the recession is over. Right in the middle of the '81/'82 recession, there was one quarter when GDP increase 4.9% (annualized).

On recession dating: 1The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the recognized group for calling dating recessions in the U.S. It is always difficult to tell when a recession has ended, especially with a jobless recovery (something I expect again). As an example, it took NBER over a year and half after the 2001 recession ended to call the trough of the cycle. And it took 21 months after the 1990-1991 recession ended for NBER to date the end of the recession.

From the 2003 announcement of the end of the 2001 recession:
The committee waited to make the determination of the trough date until it was confident that any future downturn in the economy would be considered a new recession and not a continuation of the recession that began in March 2001.
The economy was still struggling in 2003 - especially employment - but the NBER committee members felt that any subsequent downturn would be considered a separate recession:
The committee noted that the most recent data indicate that the broadest measure of economic activity-gross domestic product in constant dollars-has risen 4.0 percent from its low in the third quarter of 2001, and is 3.3 percent above its pre-recession peak in the fourth quarter of 2000. Two other indicators of economic activity that play an important role in the committee's decisions-personal income excluding transfer payments and the volume of sales of the manufacturing and wholesale-retail sectors, both in real terms-have also surpassed their pre-recession peaks. Two other indicators the committee focuses on-payroll employment and industrial production-remain well below their pre-recession peaks. Indeed, the most recent data indicate that employment has not begun to recover at all. The committee determined, however, that the fact that the broadest, most comprehensive measure of economic activity is well above its pre-recession levels implied that any subsequent downturn in the economy would be a separate recession.
This is relevant to today. It is very likely that any recovery will be very sluggish, and if the economy turns down within the next 6 to 12 months, the NBER would probably consider that a continuation of the Great Recession.

Yesterday San Francisco Fed President Janet Yellen argued the recovery would be "tepid". She pointed out that there will probably be a boost from an inventory correction in the 2nd half of 2009, but that that boost will be transitory:
I expect the biggest source of expansion in the second half of this year to come from a diminished pace of inventory liquidation by manufacturers, wholesalers, and retailers. Such a pattern is typical of business cycles. Inventory investment often is the catalyst for economic recoveries. True, the boost is usually fairly short-lived, but it can be quite important in getting things going. ...
But then what happens in a couple of quarters? Where are the engines of growth? As Yellen noted:
The chances are slim for a robust rebound in consumer spending, which represents around 70 percent of economic activity. Of course, consumers are getting a boost from the fiscal stimulus package. But this program is temporary. Over the long term, consumers face daunting issues of their own.
As I noted in March (see Business Cycle: Temporal Order), the usual engines for growth coming out of a recession are Personal Consumption expenditures (PCE), and Residential Investment (RI). If PCE is weak, we are left with residential investment. Although it appears RI has bottomed, I doubt we will see much of a rebound until the overhang of existing home inventory is reduced. That is one of the reason the DataQuick SoCal report this morning was so important - it might signal another downturn for sales in the existing home market (and possibly new home market).

Although I started the year looking for the sun, I remain concerned about the possibilities of a double dip recession - or at least a prolonged period of sluggish growth. And this means the unemployment rate will continue to rise well into 2010; I expect the unemployment rate to hit 10% in November (or so). See: When Will the Unemployment Rate hit 10%? .

There is an old saying: "A recession is when your neighbor loses his job, a depression is when you lose your job." Unfortunately 2010 will probably feel like a depression to a large number workers.

More on NBER and double dip recessions:

Here is the NBER dating procedure.

Note that the trough of the 1980 recession was only 12 months before the beginning of the 1981 recession, but the short recovery was fairly robust with real GDP up 4.4%. Those two recessions are frequently called a "double dip" recession, but the NBER considers them as two separate recessions.

1 Some of this post was excerpted from a previous post.

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