Official Recession? Does it Matter?  

Official Recession Or Not?  And Does it Matter?

Written Thursday, May 1st, 2008:  Yesterday our first look at the US’s Growth Domestic Product or GDP for short, showed a gain of +0.6%, a little above the consensus view.  But the US consumer, who accounts for the bulk of economic growth with our spending prowess, posted the smallest gain in spending since the last recession, up at just a +1% annual rate and less than half of the +2.3% growth rate in the last quarter of 2007.  So with consumer spending so weak we should have posted negative growth, right?  What kept us out of the negative growth category was the weak US dollar which helped boost our exports.  Plus we grew +0.6% because businesses somehow increased inventories, i.e., meaning they produced more than was sold.  This production factors into growth.  Schwartz View:  Guess I have to start asking just when a reduction in inventories will occur.  Obviously the auto industry, a big factor, is cutting back now with General Motors saying three days ago that it will cut production by 138,000 trucks and SUVs at four plants in the US and Canada this year.

Therein lies a key question about growth and recession.  Should these increased exports and built up inventories count toward growth?  I guess I’m having a little fun with the Fed and Treasury Department because, remember, they subtract out rising gas and food prices and then tell us inflation is still low.  When anyone who buys gasoline and shops for food believes otherwise.  My reasoning then is why don’t we subtract out those items contributing to GDP growth which aren’t consumer paid?  If we did subtract out exports and inventories we’d sure get a better sense of what’s really going on in America and what our  people are feeling and how financially the country and us individually are doing.  Fair is fair.  Right?

To be truly fair, in terms of calling this slowdown a recession or not, we have to delve a bit deeper.  The 2001-2002 recession didn’t produce two consecutive quarters of negative GDP growth, the old way of defining a recession.  Many have forgotten that fact, but not, I’m sure, the group which calls a recession, the National Bureau of Economic Research and its president Martin Feldstein.  They were the ones who gave the “R” word to the economy back in 2001 without the stats showing two consecutive quarters of growth.  By then they used an alternative definition, writing:  “A recession is a significant decline in economic activity spread across the economy.”

So this time around some are saying if it looks like a duck and squawks like a duck, it’s a duck.  Such as Mark Vitner, senior economist at Wachovia Corp who said so yesterday.  He said he thinks we’ll have a recession even if we don’t post two negative GDP reported quarters in a row.  The interviewer was left at a loss by this.  No one obviously briefed her about how the or why the 2001 slowdown was branded as a recession.  (Sometimes these interviewers are made to look a bit foolish, say right after an answer, they ask the same question already answered.  But, hey, gotta give ‘em credit for chutzpah!  Anyway, it’s a good time for me to complain a little.  I wish that CNBC didn’t have their interviewers cut off their guests left and right.  Just terrible manners.  I know, I know, they have to keep on some timetable, still … yuck!)

Schwartz View:  My point is that we could very well be in now, or soon go , recession even without US GDP going officially negative, at least not for two quarters in a row.  Say this current quarter turns negative as inventories get cut back which finally skews the stats against us.  Then the forthcoming tax rebates kick in, boosting growth by about  2 to 3 percentage points in Q3, 2008To me that would avoid the old time definition of recession but this temporary boost to US consumer spending wouldn’t go to work on the roots of our problem.  Which is spending TOO much and on CREDIT.  Ultimately to move forward we have to get our own house (our finances) back in order.