What’s in a name? Would a recession by any other name be as painful? That’s the debate that raged a few years ago as economists and commentators debated whether we were officially in a recession or not. As economist Paul Krugman argued in 2007:
“The official definition of recession has become delinked from peoples’ actual experience. Right now, we’re in an economy with deteriorating employment and incomes, collapsing home prices, and business retrenchment. Is it also an economy in recession? Who cares?”
Broadly speaking this is true. Most of the time and for most people, the difference between no growth and contraction probably doesn’t mean that much. However, we are in a much different situation now than we were in 2007. The Federal Reserve has more or less gone all in with its open-ended quantitative easing. The government’s fiscal mechanism is paralyzed and a large portion of the electorate has no appetite for further fiscal stimulus. If the American economy were to go into a so-called “double-dip” recession the government would be especially hard-pressed to drag us out. It would be a huge blow to the nation’s confidence and would lead to shrinking government revenues and further net job loss in both the public and private sectors.
For those reasons, it’s more than a little frightening that we’re seeing a spate of depressing numbers that could signal a recession on the horizon — or that one is already here. On Thursday the Commerce Department revised down its estimate of second-quarter GDP growth to 1.3% from an already sluggish 1.7%. If that weren’t bad enough, the Department also reported that orders of durable goods – long-lasting pieces of equipment like airplanes or heavy machinery – fell 13.2% in August. And Friday, the Project Management Institute was out with a survey which showed that manufacturing activity in the Chicago region was contracting, surprising many analysts. While it’s unwise to read too much into any one of these data, the three in succession are unsettling.
These data also give ammo to bearish commentators who have long been predicting a recession in either late 2012 or early 2013. John Hussman, president of Hussman Economectrics Advisors, is one of those bears and he has recently reiterated that prediction. In his most recent note Hussman wrote:
“We continue to infer that the economy has already entered a recession – something that will probably take several more months to be broadly recognized. We’re seeing fresh lows on the most leading economic component that we infer using unobserved components methods . . . matching weakness that emerged in late 2000 and late 2007. On a slightly positive note, we don’t yet see the near free-fall in these measures that occurred later in 2001 and 2008 as economic weakness rapidly gained momentum.”
And Hussman isn’t the only one. The Economic Cycle Research Institute – which has good track record calling recessions – has also been predicting a downturn. Now the ECRI is saying that the U.S. is in recession as we speak:
“It has been almost a year since we predicted a recession. Back in December, we went on to specify the time frame for it to begin: if not by the first quarter of the year, then by mid-2012. But we also said at the time that the recession would not be evident before the end of the year. In other words, nine months ago we knew that, sitting here today, most people probably would not realize that we are in recession – and we do believe we are in recession.”
There are dissenting opinions however. The one true strength the American economy has in its corner is the slowly recovering housing market. Bill McBride at the blog Calculated Risk sees the housing sector as a reason why we’ll see growth kick up in the second half of the year going into 2013. Writes McBride, “I think the recovery in residential investment will pick up next year . . . I do think there will be a large increase in housing starts and new home sales in 2013.” McBride also points to a slowing of contraction in the government sector as reason for optimism.
Recessions are notoriously hard phenomena to predict. Any economy is an amalgam of moving parts – any one of which could seize and slow down the larger machine. The headwinds that the global economy is facing are abundant and manifold: the sovereign debt crisis in Europe, high unemployment at home, a slowdown in China and the nearing fiscal cliff. At the same time, barring some malady, the natural state of an economy is growth: populations expand, technology advances, workers become more efficient at what they do. If the global economy can successfully navigate the many headwinds facing it, slowly pay down debts and re-employ workers, there will come a point when the recovery shifts into high gear. Then again, we could have already entered a recession without even knowing it.