An entertaining parody of the mindset of many of today’s economists. Also a great illustration of network externalities.
The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.
In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.
The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007
Robert Barr’s comments from the latest trend tracker:
Is the recovery petering out? Are we at the onset of another dip into recession? The latest news seems ominous, and even former Federal Reserve Chairman Greenspan said in mid-July that “the economy hit an invisible wall in early June.”
There are some hopeful signs, however, including a show of resiliency in the well-respected economic activity indexes published by the Institute of Supply Management. And monetary policy remains in gear for economic growth, with continued low interest rates.
One issue that makes the short-term forecast particularly challenging at this point is the impact Washington is having on the economy. At a minimum, it’s creating additional uncertainty that makes expanding businesses and hiring more workers at this point in the recovery even more an act of faith that it usually is.
The chief executive of Verizon Communications, Ivan Seidenberg, said it clearly in June: “By reaching into virtually every sector of economic life, the government is injecting uncertainty into the marketplace.” The result? More difficulty for business in raising capital, expanding existing businesses, and creating new businesses –the last thing this economy needs now.
Add to that the tax hike in store at the beginning of 2011 with the expiration of the 2003 Bush tax cuts, the uneasiness over the impact of the health care law, and concerns over the expanding federal debt load. These costs will impede the economic recovery, especially a few years from now, as interest rates rise and the cost of servicing the national debt takes bigger and bigger chunks of our tax revenue.
So it’s easy to talk yourself into a lot of pessimism about the economy. But will these concerns strangle our nascent recovery? Will government policy push us into another round of recession over the next year?
Well, probably not, or so we’re thinking. While we recognize the burden Washington is placing on the economy and would argue that economic growth will be measurably less in the coming year than it could have been with better federal economic policy, we don’t think it’s enough to smother the recovery. Productivity growth and improved technology keep the recovery going. As for the 2011 tax increases, they’ll be smaller than those imposed on the economy in the early 1990s, and nobody today speaks of the Clinton recession. Monetary policy had a lot to do with maintaining economic growth then, and policy today is even more stimulative.
So although we think we’ll avoid a double-dip recession in 2010-11, economic growth over the next three or four years will be underwhelming, we believe. There are several elements of the Congressional and Administration approach to the economy that are damaging the entrepreneurial climate (see, for example, the labor policies that push up wages through politics and not productivity, the treatment of Chrysler bondholders relative to the auto workers union, and threat of imposing cap-and-trade on American businesses and households) – but we think we’ll get through the next year with the recovery intact and, in fact, stronger than it appears to be now.
But we can’t escape the conclusion that the biggest economic risk may be the continued apparent antipathy toward commercial activity from Washington, coupled with the resulting increase in entrepreneurial uncertainty.
Robert Barr is an economist based in Virginia.
The GDP report from the BEA raised a lot of concerns about the economic recovery, based on headlines and reports like this:
Mark Perry comments: But how does GDP growth in this recovery (assuming the recovery started in third quarter of 2009) over the last four quarters (1.6%, 5%, 3.7% and 2.4%) compare to output growth in the four quarters following the last two recessions in 1990-1991 and 2001? Pretty good actually, see the graph above showing real GDP growth in the one-year periods (four quarters) following the last three recessions.
Sure, real GDP growth has slowed from 5% to 3.7% to 2.4% over the last three quarters, but following the 2001 recession real GDP slowed even more, from 3.5% to 2.1% to 2% to 0.1%. And looking at the average growth over the four quarters following the last three recessions, the average 3.18% real GDP growth over the last year was higher than the 1.93% following the 2001 recession and higher than the 2.63% following the 1990-1991 recession. Keep in mind that the economic recovery that started in 1991 was the longest (120 months) and strongest economic expansion in the history of the U.S.
So what about a headline like “U.S. economic expansion stronger now than at the beginning of the last two recoveries?”
It could’ve shaped up to be a good week. After all, the Senate pushed through a vote on bank reform, bellwether earnings weren’t all that bad, BP finally seems to have halted the spewing oil in the Gulf, the Northeast got a small reprieve from the heat wave — and last but not least — Apple announced plans to rectify “Antennagate.” Nevertheless, U.S. stocks ended the week on a sour note, as the Dow Jones Industrial Average plunged more than 250 points Friday.
Bank reform moves ahead. This week, the Senate approved the most historic shakeup of the regulation of U.S. banks since the Great Depression. The legislation would place new fees and restrictions on the nation’s biggest banks, impose new restrictions on the Federal Reserve and craft a major new consumer-protection division for mortgage and credit-card products. Read more about the bank-reform legislation .
Just-in-case stimulus. Federal Reserve officials agreed it would be a good idea to study what to do if the economy were to worsen severely, according to a summary of June’s closed-door meeting released this week. Officials said the outlook for the recovery had softened between April and June, but changes to their forecast were “relatively modest” and “not warranting policy accommodation beyond that already in place.” Read more about the Fed minutes .
BP cap seems to be holding. BP shares (BP) slipped Friday as euphoria over the company’s apparent success in stopping the flow of crude from its ruptured well gave way to the realities surrounding the worst oil spill in U.S. history. In its latest update, BP said the well cap continues to hold. But the ruptured well isn’t dead yet, prompting a cautious tone from President Obama in his remarks on the spill. Read more about BP’s efforts to contain the leak .
Also, the latest from Bill Conerly.
The latest from Robert Barr in the Floral Trend Tracker. He makes a good point about the money that federal, state and local governments are borrowing for their programs.
With a number of economic indicators flashing green over the past couple of months, it sure seems like we’re leaving the recession behind. Even new home sales are rebounding, up 15% in the last three months (May, through July) relative to the three months prior (February through April), even after seasonal adjustment.
But even if we’re in a “statistical” recovery, the economic climate will feel sluggish. Expect to hear a lot about our “jobless” recovery well into 2010, as though that’s a contradiction in terms. It isn’t; the last two recoveries were marked with very low job growth for quite some time. In fact, the jobless recovery of 1992 felt so oppressive that the presidential campaign treated it like a recession: “It’s the economy, stupid!” And 20 months after the recovery began (as was determined later), the poor economy was a key contributor to President George H.W. Bush’s defeat in November 1992.
So it ís not surprising that, even as we get some positive reports, we see that employment is still falling, with the number of payroll jobs 4.2% lower than it was a year ago.
Why such a lackluster recovery? The economy is still making major adjustments to the severe imbalances that created the worst financial crisis since the Great Depression.
Bank lending activity remains low, especially for small business expansion. The willingness of banks to lend to consumers continued its two-year descent during the summer. True, analysts were quick to point out that the declines were less severe than those of a year ago. But still, after the plummet of the past year, we’re still falling to even lower levels today. Bank lending standards across all major loan categories to households and businesses also continued to tighten.
For their part, households are improving their balance sheets ñ saving more and consuming less. Many suggest that this lack of spending is harmful to the economy — as if to be economically beneficial, income should be spent immediately and not saved. But that’s a misconception. It’s easier to see the beneficial effects of immediate spending (Look! They bought cars, homes, and furniture!) but the beneficial effects of saving, while less visible, are nonetheless critical to long-term economic growth and prosperity. More household savings expands the pool of available capital for firms to borrow to expand their business.
That means funding the same level of economic activity will require less borrowing from overseas and lower interest rates in the economy.
Then the issue becomes: if rates are low and funds for lending are available, are businesses willing to borrow and expand production? How confident are they that the economy will be ready to buy their expanded set of products? As always, business confidence and entrepreneurial assurance will need to be in place to generate a sustainable recovery.
Looking long-term, the massive increase in government debt will offset the progress households are making in correcting their debt imbalances. The deficit-to-GDP ratio in 2008 was 3.2%; in 2009 it’s expected to be 11.2%, and the administration ís ten-year forecast projects that the U.S. will exceed $9 trillion in total deficits just over the next ten years. That’s in addition to the $5.8 trillion national debt we’ve already accumulated.
Why is that important for future economic growth? Because the money that federal, state and local governments borrow for their programs can’t be lent to businesses to fund private-sector projects. Consequently, the more we allow the government to borrow, the less we have to channel toward productive investment.
From Robert Barr…
Has the economic storm passed? The trashing of the wind and rain has settled down significantly, and perhaps it’s time for consumers and business to come up out of their shelters, look around, start removing debris, and start the economic recovery.
That’s one way to think about the economic conditions today — but a more appropriate analogy is that the relative calm we’ve seen during the late spring and early summer is only the eye of a passing hurricane. We’ve gone through great economic tumult, especially since September 2008, but there’s still more economic adjustment yet to come.
Two areas of particular concern that haven’t yet grabbed the headlines in the same way that residential real estate has are commercial real estate, where refinancing maturing loans is becoming more and more difficult, and consumer credit cards, which will probably face huge write-offs in the coming few years.
And we’re still facing an adjustable-rate mortgage reset problem, as the popular five-year ARMs taken out in 2005-06 go through the same initial reset phase we saw in subprime mortgages (which generally reset after the first two or three years). One mitigating factor is that today’s lower interest rates mean that the new, reset rates won’t generate the same amount of payment shock seen with the subprime mortgages.
Meanwhile, consumers aren’t spending in the same way they had a few years ago, pushing the consumer savings rate from about zero a few years ago to almost 7% of GDP this spring. That’s prudent, of course, and good news for the long-term health of the economy. Consumers know that jobs are being cut and that the soaring government deficit will have to result in higher taxes down the road. Baby boomers, seeing the devastation in their 401(k) accounts just as their oldest members reach retirement, know they need to save more today to ensure a financially secure tomorrow. All of this is keeping consumers from reaching for their wallets, and it amounts to another difficult economic adjustment.
Meanwhile, in addition to grappling with the recession, businesses face a couple of critical unknowns in how they will be able to operate within the next few years. Whether or not you support national healthcare or the cap-and-trade energy legislation working its way through Congress, there’s great uncertainty about how this will play out in two to five years from now. Sound long-term investment decisions are difficult to make when the rules of the game are subject to such significant change – even apart from whether the changes actually support or harm the business climate. Even if the recovery does take hold, expect another “jobless” recovery as businesses bide their time to sort out the ramifications of what the federal government decides to impose.
Meanwhile, the rate of economic contraction in the global economy accelerated during the first half of 2009, and that of course will harm our exporting industries.
What to make of all this? Despite the media reports of the “green shoots” of economic recovery, we still have many difficult economic adjustments ahead of us that will keep any recovery subdued for some time. And that timetable is subject to whatever comes out of Washington, DC – not a good position for private businesses looking to rebuild after the destruction of the storm of the past couple of years.
Here is an EXCELLENT short-list of action steps for the rest of the economic downturn heading into recovery:
- Love your customers. Get closer to them than you have ever been; understand and aggressively address their issues. In a poor economy, competition will increasingly be based on price, so that you need to be able to articulate your value proposition in order to justify holding your prices above the competition’s, or to be able to just hold on to the business;
- Love your bankers. Communicate with them; let them know what you are doing. Convince them that you are thinking about them and you will do whatever it takes to make sure their loans are repaid. The biggest mistake companies make with bankers is not staying in constant communication with them and then at the last minute surprising them with bad news. Debt will be difficult to obtain so make sure your credibility and communications are in place so that you will be in line to get your share. Keep your loans in good repair – do not bust covenants. Bankers will be less forgiving in this environment;
- Love your shareholders. It is much easier to get additional capital from people who know you than from people who do not know you;
- Love your employees, particularly your key employees. Although unemployment will increase, there will continue to be demand for key people and for people having skills that are in short supply. Your employees will feel insecure about the company and about their jobs. Keep them informed and involved in the process so that they do not make an uninformed decision to leave your company.
- Be relentlessly focused and realistic about your business and its prospects. You are now in survival mode and you need to be clear about what it takes to survive. Review your business strategy and value proposition to ensure they are in line with the needs of the current market environment;
- Cut costs, cut costs again, and cut costs for the third time;
- Watch your customers’ credit rating and payment history. Most will attempt to use you as a financing source and it is likely that several will fail.
- Review your payables policies. Take full advantage of the time your vendors will allow you to pay and pay just before you endanger critical relationships.
- Consider alternative sources of financing, such as asset-based lenders.
- Look for opportunities – crises breed extraordinary opportunities.
Source: Bill Patterson and Kit Webster, BridgePoint Consulting, Inc.
Hat Tip to Paul Wright for the link!