Is the Recession Over?
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The predictions seem to be flying fast and furious on the cable news shows. Everyone is looking for an expert to comment on the end of the great recession and the experts seem to be more than happy to oblige, perhaps in the hope of being recognized as the person who got it right. But what does it mean that a recession has ended? How are we supposed to react?
The end of a recession simply means that the economy “seems” to have stabilized. For over a year now the country, followed by most of the rest of the world, has been very much like an overly aggressive mountain climber who followed an unexplored route to the top, slipped, fell and dragged the rest of the hiking party down with him.
The end of the recession means that the lead mountain climber has stopped falling but the result of that original slip (all those other climbers attached to the lead) are still coming down. Many of the climbers won’t make it (small and regional banks that have failed and companies that have gone bankrupt) but they are still tied into the climbing system and have to be dealt with (the unemployed, lost and reduced suppliers, corporate supply infrastructure). There are also a good many climbers that are severely injured and will not survive their wounds (increasing unemployment further down the road).
For a recession to end, just as it did to begin, you need two calendar quarters to confirm it happened. You know a recession began only after you can look back and see that for two consecutive calendar quarters the economy was in decline so we need two consecutive calendar quarters of economic growth to say it is over. It looks like the full second quarter of 2009 won’t pass the growth test but the month of June looks like it might have, which is why the prognosticators are in public view.
The Obama administration officials are being very cautious in making any references to the end of the recession as they seem to have learned that declaring victory too soon can be a grave mistake. Besides, they know only too well that unemployment will continue to grow right into 2010 (all those injured hikers that are evaluating their wounds and still trying to stop the bleeding).
South Carolina, for instance, has the third highest unemployment rate in the country at present with it running well over 12% (that’s the state with the governor who tried to stop the people of his state from benefiting from stimulus funds from Washington while he worked on his own personal stimulus plan from Argentina). Economic forecasters in the state government firmly believe that the unemployment rate will rise at least another 2% by the first quarter of next year before seeing any leveling off. They believe that right through 2010 the rate will stay above the 12% mark.
Which brings us back to our hikers and the reality of recession ending forecasts, as just because you have stopped falling doesn’t mean you are going to be doing a lot of aggressing climbing? The scary part is that we have no idea if we are at the bottom of the canyon or just sitting on a ledge that could give way if too much pressure is put on it.
So where does all this leave us? Well, first of all, don’t make the mistake of believing that just because the stock market has recovered somewhat that things are getting better. The stock market is not the economy. The stock market rises on expectation but is driven by earnings. Expectation at the moment is low so any gain that appears to exceed expectation is cheered and rewarded. Also, keep in mind that earnings growth is based upon how well the company performed twelve months ago when it was going into freefall.
As we move into the third quarter of 2009 and will soon be comparing this year against the last one, keep in mind again that this is where the real cost cutting began to happen, and the earnings that start to appear, will not be showing many revenue increases but the stabilizing effect of cost (job) cuts.
We still don’t know how deep the canyon is and if we have more falling to do after a rest. We also have no idea how difficult it will be to climb out of the canyon since our main concern at this point is to try to prop up the ledge on which we may be sitting.
Declaring the end is over prematurely, is where the Roosevelt administration went wrong in the 1930’s. The support structure that was put into place over the previous three years began to unravel as funding and programs were cut as it was believed that the country was on the right track and it was time to begin to pay back the debt. The result produced a stagnating effect that stalled the economy in place until the stimulating effect of World War II took over.
So is the recession over? The best course of action is to assume that it isn’t and wait for the actual numbers to prove that it is. Then, assume the climb back up will be a lot tougher and longer to achieve than the fall was coming down.
© 2009 Timothy Holland First
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