The Strangest Recession in Economic History
Kurt Brouwer June 2nd, 2008
James Pethokoukis at U.S. News & World Report points out some odd behavior for a recession [emphasis added]:
The Strangest Recession In Economic History (U.S. News/Capitol Commerce Blog, May 29, 2008, James Pethokoukis)
What do you call a recession where the economy keeps going up and up, even if a bit sluggishly? Well, my friends, you call that an expansion. And that is what we seem to have right now, despite all the economic doomsaying about a recession or even a Great Depression 2.0. Today, the Commerce Department revised its first-quarter estimate of gross domestic product upward to 0.9 percent from 0.6 percent. That follows 0.6 percent GDP growth in the final quarter of 2007. The revision also makes it more likely that the second quarter will be positive, maybe 1.5 percent, maybe even higher.
Now I went back and checked the numbers for the past 50 years and didn’t find a single case of a recession-as calculated by the National Bureau of Economic Research-that started with or contained two straight quarters of positive GDP growth, much less three quarters. In a recent interview with the Financial Times, former Federal Reserve Chief Alan Greenspan admitted he was puzzled that the economy hasn’t fallen off a cliff, given the housing crisis, credit crunch, and oil price surge. He told the FT: “A recession is characterized by significant discontinuities in the data…. It started off that way-there was a period of sharp discontinuity from December to March. But then it stopped…. No one knows how this tug of war will end-specifically, whether the financial crisis will end before it drags down the real economy.”
No one is saying the economy is booming. Clearly, we are in the midst of dramatic slowdown. But even the most ursine of bears has to be amazed by the resilience of the Amazing American Growth Machine. The question now is what to do going forward to allow the AAGM to shift back into high gear…
The signals from the economy and the financial markets are clearly mixed and there are plenty of negatives, with falling home prices perhaps being the most significant. One other big negative is the dollar, which has been declining for several years, although we have seen a modest uptick recently (see Is the Euro Headed For a Fall?).
The falling dollar has also played a big role in the spike of oil prices to nearly $130/barrel from $54 at the start of 2007. The falling dollar also has contributed to soaring food prices (see High Food Prices — Why Are They Rising?).
However, as Pethokoukis points out, you cannot have a recession if the economy is growing. And, so far this year, the economy is growing, albeit very slowly. The latest release from the Institute of Supply Management bears out the theory that the economy is growing. The Institute’s Index of Manufacturing activity grew from 48.6 in April to 49.6 in May.
The Institute’s May Manufacturing Index Report on Business® spelled this out [emphasis added]:
…Manufacturing failed to grow for the fourth consecutive month in May as the PMI [purchasing manager’s index] registered 49.6 percent, 1 percentage point higher than the 48.6 percent reported in April. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
A PMI in excess of 41.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates the overall economy is growing and the manufacturing sector is contracting at this time…”The past relationship between the PMI and the overall economy indicates that the average PMI for January through May (49.2 percent) corresponds to a 2.5 percent increase in real gross domestic product (GDP). In addition, if the PMI for May (49.6 percent) is annualized, it corresponds to a 2.7 percent increase in real GDP annually.”…
For more on this quirky economic period, see U.S. Economy — Still Growing After All These Fears and The Peekaboo Recession — Is It or Isn’t It?.
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