(originally published on February 9, 2008)
The Fed's aggressive rate cutting spree last month has raised more questions for investors than it has answered. It is now increasingly becoming clear that the US may have already entered a recession, possibly as early as December 2007. The data on December and January employment, retail sales, non-manufacturing ISM, housing and other macro variables pretty much confirm it. The anemic 0.6% GDP growth seen in 4Q further confirms a sharp slowdown and a possible tipping over into a recession.
The average length of the post-war recessions has been around eleven months. It usually takes anywhere between six to eighteen months for the National Bureau of Economic Research's (NBER) Business Cycle Dating Committee to formally declare a recession. So by the time the NBER declares a recession, we might have already come out of it.
A recession is defined by the NBER as a significant decline in economic activity spread across the economy, lasting more than a few months. In determining business-cycle turning points, the committee follows standard procedures to assure continuity in the chronology. Since a recession influences the whole economy and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. It considers real GDP to be the single-best measure of aggregate economic activity. However, since the Bureau of Labor Statistics reports real GDP estimates only quarterly, a variety of monthly indicators are used to determine months of peaks and troughs. Particular emphasis is placed on two monthly measures of economic activity : real personal income less transfer payments, and employment.
A comparison of real GDP and the unemployment rate. Note the spikes during recessions.
While both the real GDP and the unemployment rate have not entered recessionary territory yet, they are periliously close. It is interesting to note that debate has now quietly shifted from whether a recession is likely to how severe and prolonged the recession could be. According to a ABC News/Washington Post poll released this week, 59% of Americans think the economy is already in a recession. A Consumer Comfort Index from the same surveyors has dropped 13 points in the past month to its lowest in more than 14 years, just as it did in the four weeks prior to the 1990-1991 recession and near the 14-point drop preceding the 2001 recession. In a recent WSJ survey, Wall street economists put the chances of a recession at an even 50%. Ditto with a similar survey done by Bloomberg. Morever, if a recession does materialize, economists place a 39% odds of it being worse than the previous two 'mild' recessions.
The cover on Newsweek magazine a fortnight back was titled 'The Road to Recession'. The fact that this cover story title was written without even a question mark is a signal of how far the consensus has moved towards the recognition of an unavoidable recession that may have actually already started. Businessweek carried two back-to-back gloomy editions titled 'Meltdown' and 'Credit On The Edge'. While the efficacy of the magazine cover indicator as a contrarian signal is debatable, if things do indeed become as bad as what the media seems to be predicting, it will be the most widely predicted crash in history!
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