Head winds, volatility, mortgage-related assets, collateralized debt obligations, Federal Deposit Insurance Corporation, auction rate securities, false bottom, recession. “Words, words, words,” as Eliza Doolittle screamed at Professor Higgins’ insistence on precision in their pronunciation and usage. We have been deluged with often confusing terms.
Most important is “recession.” There is a widespread misunderstanding that we are in a recession when the economy records two quarters of negative growth. So when the gross domestic product growth figure for the last quarter of 2007 was revised from a positive 0.6 percent to a negative 0.2 percent, it seemed that one more such negative number, and America would be officially in recession.
Not so. It is up to the nonprofit National Bureau of Economic Research to decide whether America has slipped into recession, and it doesn’t do so unless in its judgment there is “a significant decline in economic activity spread across the economy, lasting more than a few months.”
If the folks at the NBER spent their days listening to the cries of pain in the halls of such as Merrill Lynch, which has taken write-downs of $46 billion in the past year, they would long ago have signaled “recession.”
But if instead they listen to men on the hard edge of the consumer economy, they might think things are booming: Bob Iger, chief executive officer of Disney, says his theme parks are booming and he sees no sign of recession.
The NBER recession-callers might instead turn for guidance to leading central bankers. But it would avail them little. Some Federal Reserve Bank officials think the economy is in bad shape and getting worse. But simultaneously, many Fed officials are passing the word that their major concern is inflation.
The fact is that the economy continues to grow, at the modest but nevertheless positive rate of 1.9 percent in the second quarter; exports are up over 9 percent, adding perhaps two percentage points to GDP growth; oil prices seem to be easing; 74 percent of Americans characterize the financial situations of their households as “very good” or “fairly good”; and even though the jobs market is weakening, unemployment, at 5.7 percent, remains relatively low by historic standards.
So the NBER team is holding fire. Many observers, among them Democratic politicians in control of Congress and therefore in a position to affect the course of the economy, say that whatever the irresolute academics at the NBER may or may not say, we are in a recession and must act accordingly.
They are calling for restrictions on free trade, and are cheering the announcement of the death of the Doha Round at the hands of politically powerful farmers around the world. Never mind that such steam as the U.S. economy currently has is generated by exports — the trade unions are in the saddle and ride Democratic policy.
And they are demanding another stimulus package. But not one that puts money directly into the pockets of consumers, as the last one did. Instead, they want to hand perhaps $50 billion to state and local governments that are experiencing declining property tax receipts to spend on infrastructure projects employing union workers.
John Maynard Keynes is smiling down upon the Democrats, or up at them, depending on your view of the current location of the great economist. Ed Lazear, chairman of the President’s Council of Economic Advisers, counsels caution, and points out that many checks are still in the mail from the first stimulus.
The plain fact is that the NBER is holding fire because it is difficult to decide just what is going on. We know a few things. High oil prices are hurting the auto, airline and other industries, and pinching consumer demand.
Falling house prices and rising foreclosures are causing problems for some homeowners and mortgage lenders. What Alan Greenspan calls a “once in a century” credit crisis is forcing many banks to take write-downs and making it difficult for consumers and businesses to borrow.
We know, too, that the steps taken by Hank Paulson and Ben Bernanke have probably forestalled a collapse of the banking system, and that the steps not taken by a Democratic Congress to increase oil supplies are contributing to prolonged high oil prices.
As for housing, perhaps we will know more when the newly enacted legislation to boost the housing market makes itself felt in the final quarter of the year.
That might give the NBER gurus the information they need to decide whether to call what is going on “a recession.”
