Recession: It might be worse
2008-03-11
By Donna Johnson and Boyd Klingler
Donna, leading the cheers of the doomsayers, says this: “Most economists think that the technical definition of what characterizes a recession is for amateurs.”
All I can say is “What?”
If, by most economists, she means academic economists, like Ben Bernanke, who have no experience in the real world perhaps she’s right. Those economists, of course, are wrong, as common sense tells us. By definition, if an economy is growing, it is growing. If it’s contracting, well… it’s contracting. Period. There is no such thing as a recession if the economy is growing. There can certainly be stagflation – low growth accompanied by both rising inflation and rising unemployment. Always ugly, stagflation is more damaging over time to the broader economy than a straightforward recession, but it is a different animal, with an entirely different set of solutions.
Recessions, even Donna and her economists will concur, are generally, though not always, characterized by rising business inventories and unemployment, lower consumer spending and lower aggregate income, corporate and household. Unsold inventories cause businesses to lay off employees, lowering household income. Lower household income leads to lower consumer spending. Business income drops as consumers pull in their horns. Ouch.
So, let’s check the data. After the anemic first quarter last year in which GDP staggered in with only a 0.6% growth rate, the middle of the year accelerated. Based on a (mistakenly) reported drop in August jobs on top of the subprime mortgage mess and credit contraction, the Fed decided that it had better start lowering interest rates.
Naturally, the boom died on the vine, as economic actors figured that the Fed must know something they don’t. Simple fear can affect behavior. Why pay going rates, when you know the Fed isn’t done cutting them. And so it came to pass: Fourth quarter GDP showed that businesses indeed held spending in check, cutting inventories by over $10 billion, and consumers cut back on large financed purchases. Oh yeah, and housing contracted even more. Sure enough, fourth quarter GDP growth again limped in at 0.6%.
However, aggregate consumer spending grew in the fourth quarter, as did income. Corporate profit growth was higher, too. Not to mention an addition of 282,000 jobs in the period. To recap, GDP expanded, inventories didn’t sit unsold in the quarter, businesses created new jobs, consumer spending increased and aggregate income rose. Slow as growth was, does it sound like a recession to you? Me either.
In the meantime, inflation ratcheted higher in the quarter. In fact, gold surged over $800 an ounce, oil hit $90 a barrel and the dollar seemed to make daily lows against other currencies. It seems to me that we can now safely say that Ben Bernanke, academic, jumped the gun on lowering interest rates. The economy has slowed in reaction, and inflation hangs on like a bad habit.
First quarter GDP growth may actually contract, but with the Fed keeping rates low, there will be a lot of money running around later in the year. Growth will probably accelerate in coming quarters, but inflation looks to continue higher. Since the first of the year, gold, oil and the dollar have continued their respective trends. (And how!) Not, by the way, a hearty endorsement of current monetary policy stewardship. Spiraling inflation bodes ill for employment, and Donna correctly points to the decline in payrolls. Businesses look for cost savings to counteract the hidden inflation tax, and lowering payrolls is where they will increasingly look, until prices calm down. It’s starting to smell to me like stagflation. The 1970s provided a decade of it. Believe me, it wasn’t pretty. If you’re under 45, you were a kid then. Ask your folks how they liked it.
Read Donna’s “duck and cover” take on the current economy
Donna Johnson and Boyd Klingler are Giving You the BusinessSM, in an occasional column for EbonyJet.com. Send your business and finance-related questions to our e-mailbag.
