It’s official: for the last year, the United States economy has been in recession.My earliest blog discussing the on-coming recession was 10/25/07 Roubini revisits his 2006 prediction of 2007 Recession and I discussed it further 11/12/08 with Credit crisis is and will be really bad .
The evidence of a downturn has been widespread for months: slower production, stagnant wages and hundreds of thousands of lost jobs. But the nonpartisan National Bureau of Economic Research [NBER], charged with making the call for the history books, waited until now to weigh in.
In a statement released Monday, the members of the group’s Business Cycle Dating Committee — made up of seven prominent economists, most from the academic sector — said that the economy entered a recession in December 2007.
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators,” the members said in a statement. “A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”
The committee noted that the contraction in the labor market began in the first month of 2008 and said that the declines in most major indicators, like personal income, manufacturing activity, retail sales, and industrial production, “met the standard for a recession.”
“Many of these indicators, including monthly data on the largest component of G.D.P., consumption, have declined sharply in recent months,” they wrote.
On 12/11/2007, still discussing the inevitable on-coming very deep recession I wrote Recession question now: not if, but how bad. in which I stated
How bad will it be? We still don't know that yet. But remember, this post started out discussing whether the recession would have a soft or hard landing. Going in to the recession we already have a wave of home foreclosures. That, too, is expected to get worse. All the signs are that this one is going to be worse than the recessions in 1990-1991 and 2001. So don't make any major credit purchases that you have to depend on keeping your job to pay off. Lay in savings. Hold down Christmas spending - let someone else keep up consumer demand during the Christmas season, because there will be no one left to do it afterwards.That's good advice this year, too.
Oh, and Merry Christmas.
Then 12/26/2007 I wrote A deep consumer-driven recession is just starting - expect at least two years. Here is what I wrote then.
But the net negative in real sales is even worse than it looks at first glance. For that you need to go watch as Howard Davidowitz explains in the video at the very bottom of the article at Calculated Risk.. The net negative real increase in retail sales comes on top of an increase of 5% in new retail stores opened this year. All that additional overhead contributed absolutely no new revenue to retailers over the Christmas season. Davidowitz' discussion is a very fact-filled clear analysis, explaining why we are going into a deep consumer-driven recession that will last at least two years.I am not an economist by profession, although I have an undergraduate BS in economics and enough graduate economics to be qualified to teach it at a junior college. So If I could see it coming that far back, why didn't the Bush administration pick up on it and react?
Two points I want to focus on. First, Davidowitz points out that the real problem is that the consumers are tapped out. The housing bubble was designed (by Alan Greenspan) to keep the economy afloat during President Bush's first term in office. [My analysis, not Davidowitz'.] It did so. But in spite of the tax cuts that the Republicans claimed would stimulate the economy, there was no net demand created by the tax cuts to cause the economy to expand. What net increase in demand that occurred came from defense spending, and from home-owners refinancing their homes as the value went up to pay off credit card debt they had run up. The economy is driven by demand in three areas:
The consumers are tapped out. No pay raises since 2000, no savings, and now no mortgage gains to tap to keep the economy afloat. A symptom of the inability to the consumers to further support the economy is the rising rate of delinquencies and defaults on credit cards.Demand (and GDP) = consumption (70%) + Investment (20%) + government spending (10%)
Now the investors are finding it more and more difficult to get loans, so deals aren't being made, making investment a net negative also. And military spending, the only part of government spending that was increasing, has little secondary economic impact. Military weapons systems simply are not economically productive. all of which leads me to my second point.
The Republicans are going to be selling more tax cuts as a solution to the economy. But this is a consumer-driven recession, not an investment-driven one. Tax cuts, even if they did work, will not resurrect an economy in a consumer driven recession! Nor will they increase investment in an environment is which investors have no way of knowing which potential investments are high-risk and which are not. Investors will either sit on their cash or invest it overseas in Euro-denominated investments. Neither investment nor consumption can be increased by tax cuts.
So now go and watch Howard Davidowitz's excellent analysis at Calculated Risk. Unfortunately, he confirms much of what I have believed about our miserably mismanaged economy.
Americans will now suffer from listening to the snake oil sold by the conservative ideologues about a free market and minimal government regulation. [For more on this, go see Rick Perlstein's blog, with particular emphasis on his items labeled "The Big Con."]
Oh yeah, and have a Happy New Year.
Oh, wait. That's right. They are driven by conservative philosophy. The government can't do anything, so they didn't try. In fact, Greenspan, depending on his absolute belief in the ability of free unregulated markets to correct problems without intervention, went ahead and lowered interest rates so low that the housing bubble was the rational outcome.
The Reagan Revolution and the conservative movement together with unregulated Wall Street banker's greed and ignorance has brought the American and the world economy to its current distressed level. Now the taxpayers are being stuck with the bill of bailing out the results of bad right-wing economic ideology.