Is the recession over?
Jul 26th 2009 9:30AM
Updated Dec 4th 2009 6:46PM
Is the recession over? Not bloody likely. First of all, calling the current economic contraction a recession is like calling Bubonic Plague a slight illness. We are clearly in the worst economic contraction since the Great Depression. Secondly, the official organization that dates recessions -- the National Bureau of Economic Research (NBER) -- defines the current recession based primarily on job losses -- not two consecutive quarters of GDP contraction.
And by that measure the NBER judged that the recession began in December 2007. With about 6.5 million jobs lost since then and another 546,000 initial jobless claims in the most recent July week for which statistics are available, it is difficult to see how anyone could make the claim that the recession is over. To be fair, that number is down from previous months but it still suggests a substantial number of lost jobs.
But despite the lack of compelling evidence to bolster its case, Newsweek is declaring that the recession is over. It looks like Newsweek's 'evidence' hinges on its analysis of the $787 billion stimulus package. It presents White House numbers claiming that 1.5 million jobs will be 'saved or created' by the fourth quarter of 2009 and another 3.5 million by the fourth quarter of 2010. But the White House suggests that only 10 percent of those stimulus jobs will be saved or created this year.
There is a significant amount of approximation in the employment statistics so it is difficult to assess the 3.5 million jobs that the White House expects will be saved or created. I doubt that the official employment statistics count the number of jobs saved.
But the official employment numbers do include estimates for the number of jobs created by something called a birth-death model -- which added 800,000 jobs to the official employment statistics due to the creation of jobs from small businesses that it assumed were born in the last year. Considering venture capital's recent nuclear winter, it may be that those 800,000 assumed jobs don't really exist at all.
The key to getting out of the recession is to revive consumer demand in the short-run and to create new corporate demand in the long-run so that the economy is not so dependent on over-leveraged consumers to buy more stuff that they could not afford -- given their contracting incomes -- without the debt. If consumer demand rises -- as the unemployed get jobs -- this would boost GDP growth.
However, such demand is not imminent. How so? Companies have been relying on cost cutting to beat earnings expectations. That cost cutting reduces consumer demand since cost cutting means more consumers without jobs who spend less and can't get increasingly scarce loans to pay for new consumer goods -- such as back-to-school items -- the purchase of which is expected to slump by 7.7 percent.
Some of the stimulus money is going to areas that might create new corporate demand -- such as electronic medical records, alternative energy, and smart electrical grids. But my guess is that unless entrepreneurs and venture capitalists step in to fuel new industries, the stimulus plan's efforts to create corporate demand will be a pilot light that gets blown out.
In the meantime, there is not much evidence on which to base a claim that the recession is over. The NBER took almost a year to declare the start of the current recession as December 2007. If the economy actually starts to create enough new jobs to offset the ones that have been lost, I hope the NBER will mark the recession's end more promptly.
In the meantime, what is your view? Is the recession over for you?
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.