Is This Really A Recession?

The newly appointed Secretary of State, Hillary Clinton, made her first visit overseas as chief diplomat, to one of the most valuable US partner in financial matters, Japan. This happened on the same day that the $787 billion stimulus package has been signed by Obama. In his remarks, the president noted the importance of cooperation as far as the economy goes, and one could read between the diplomatic presidential lines, that he was pleased with the result:

What I am signing, then, is a balanced plan with a mix of tax cuts and investments. It is a plan that’s been put together without earmarks or the usual pork-barrel spending. And it is a plan that will be implemented with an unprecedented level of transparency and accountability.

Obama’s hopeful tone is still present in his discourse, and even though it went through many gaffs and blows from both sides of the political spectrum, the stimulus bill entails a compromise that was hard to come down to.

A crucial factor, perhaps even more important than the purely economic forces that would be required for this stimulus to do its job, is the necessary change in the psychic of the American investor (and consumer, for that matter). Since, it could be argued (admittedly more from the conservative stance) that the problem with the economy is actually the problem with the attitude of the consumer. The media played a big part in creating this atmosphere of panic, as they started talking about a recession back in the fall of 2007, when technically, a recession is defined, by mainstream economists, as negative economic growth (in terms of GDP) during two or more consecutive quarters. To my recollection, this hasn’t happened yet. Of course, unemployment has reached early 90s levels, but still, technically, this is not yet a recession.

It is however important that the bill gains international momentum. Hillary is doing internationally what the president is trying to do domestically. Reconstruct the trust in the American economy (the dollar would be a good start), and the psychic of the American and international consumer.

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5 Responses

  1. a recession is defined, by mainstream economists, as negative economic growth (in terms of GDP) during two or more consecutive quarters. To my recollection, this hasn’t happened yet.

    No, we’ve actually been in a recession since December 2007….

  2. Well, the same article throws in this quote:

    “Many people erroneously believe that a recession is defined by two consecutive quarters of economic activity declining. That has yet to take place during this recession.”

    Why he qualifies it as erroneous, I do not know, but I will find counter arguments for this, and post them here.

  3. Edward E. Leamer, UCLA Econ Professor, published this paper on the website of NBER (the same institution that is in charge of assessing a “recession”) in August of 2008, stating that the algorithm used to assess the ‘wellbeing’ of the economy showed that there was no recession in place as recently as July, 2008. This raises the question, aside from the argument of two consecutive real GDP declining, is this article therefore wrong?

  4. That’s an interesting detail — I missed it in the original article, though the two-quarters-of-decline criterion was actually met once the fourth quarter of 2008 ended. GDP dropped a half-percent in the third and just over four percent in the fourth.

    I’m obviously not an economist, so I can’t comment much on the factors that lead them to declare recessions, but here’s a useful chart to put at least one measure — job losses — into recent historical perspective….

  5. I received a good comment about this from our Economist on campus, Britteny Cioni. Here’s what she says:

    “We teach in principles that the definition of a recession is two consecutive quarters of negative real GDP growth. So, you are correct. It is a rather simple definition, however, and as you know economics is rarely simple. There are lots of things that occur during a recession including declining real GDP, disinflation (slowing of inflation) and possibly deinflation (drop in price level), higher levels of unemployment, slowing of housing starts, slowing of retail sales, etc. The NBER will look at a number of factors to determine the “official” start and end of recession or expansion and from the one article it looks like to me that they weighted job losses heavily. There is little doubt that we are in a recession among economists, a severe one at that and we have been in it for some time. The debate for economists is what it is going to take to get out of it. I hope this helps.”

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