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Aren’t we already in a recession?

Economists debate whether the economy may be headed for recession, but many readers believe we are already in one.  The Answer Desk, by’s John W. Schoen.
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Last week's news that the economy lost 17,000 jobs in January renewed questions about whether the economy is heading into recession, or may already be in one.

Those concerns have been underscored by this week's disappointing results from major retailing chains, as well as a report on the service sector that sent the stock market into a tailspin Tuesday.

Many of our readers have been wondering why we don’t just come out and say the U.S. is already in a recession. Others take issue with our “negative” focus on the economic data that are now flashing warning signs — arguing that these stories just spook consumers and make matters worse.

The fact is, a recession is something that is not easy to define, and it is not up to us to make the decision of when one begins and ends.

I do not know why the people that think they know how the economy is doing are just now realizing how bad things really are in this country. Do you all wear rose-colored glasses or what? It would seem that the fact that most middle-class workers' wages have been on the decline along with the loss of a lot of jobs would have given them a clue a long time ago.  Almost everyone but the supposedly experts already knew what was happening.
— James J., Okla.

I see a lot of positive things going on in business, yet I don’t think that that makes headlines.  It is the doom and gloom stuff that journalists keep hammering out to the general public that do not actively get much involved in business. (The public) then sense that things are really bad, and they aren’t. I think that if we get enough journalists together we can talk ourselves into a recession. … Talk to those that have a pulse in the marketplace and you will find that we are doing relatively OK. 
— Vaughn R. Waterloo, Iowa

It’s certainly true that consumer psychology plays an important role in health of the U.S. economy. With consumer spending generating roughly 70 cents of every dollar of economic output, the public’s fear of recession can easily turn into one of its causes. But even if the press had the power to change consumer psychology (which it does not — the facts create the impact, not the reporting), it’s not our job to try to head off a downturn by cheerleading about how great things are. Nor is it our job to try to convince people the sky is falling.

At the moment, based on the mail, more readers are frustrated with the media for what they see as an underreporting of their personal financial burdens and the current problems facing the economy. We’ve recently been accused by some of glossing over “the fact that we are already in a recession.”

We pick our words carefully, and the word recession has a very specific meaning. Though popular definitions vary, the term generally refers to a period of more than a few months of declining gross domestic product. Economic conditions in some regions of the U.S. (especially in the industrial Midwest) and some industries (like housing) already appear to be headed in reverse. But a national recession can't be confirmed until the economic data show that the overall economy is in decline. (Further, economists, academics and investment analysts have, since World War II, relied on the National Bureau of Economic Research, a private research group, to provide the "official" timing and severity of recessions.)

That’s not to say that current economic conditions don’t feel like a recession to many readers. You might walk out the door, when the wind is blowing and the temperature is 33 degrees, and observe to a friend: “Wow, it’s freezing out here today.” And we wouldn’t say you’re wrong. But the weatherman won’t use the word "freezing" until the temperature is 32 degrees or lower.
Unfortunately, measuring the health of the economy takes a little longer than looking at a thermometer. Because of the time involved in collecting and analyzing economic data, it’s very possible to be well into a recession before the numbers confirm it.

Until the data make it clear, no one can confirm that a recession is under way. Until then, it would be inaccurate (not to mention irresponsible)  to report that the “U.S. economy is in a recession now.”

You provided a response as to how to "back out" sales tax. You used an example of a $20,000 car purchase and backing out 7 percent. Thank you for that, it was a great help. But if that tax was comprised of 4 percent state tax and 3 percent county tax, and I need to back out each to send separate checks, if I use your example, why doesn't it equate to the same as the 7 percent?

I've tried this multiple ways and tried drawing examples using cutting slices from a pie or removing floors from a building. I can never get a combined total of two percentages to equal a single one. I realize that you're backing out a percentage from 100 percent of something and that the second item, while a percentage of the original 100 must be removed from the remainder. It still doesn't calculate. If I "back out" 4 percent from an apple pie, remove that slice, back out another 3 percent from the other side of the pie, those two slices don't quite match my backing out one 7 percent slice?!?

Any help?
— Martin B., Address withheld

Oh. Sorry. We were daydreaming about eating apple pie and watching a building collapse. (Maybe that’s what got you off track.)

Rather than trying to look up a formula on some Web site — with no way of knowing if it’s accurate — let’s just run through the problem and come up with our own.

We’re going to start by assuming that the state and county are taxing the same original (pre-tax) purchase price — and that you’re not given credit by one tax man for taxes paid to another. (In some cases, you can get credit from one jurisdiction for taxes paid to another one. But we’ll leave the question of preparing your tax return for another day.)

Setting that issue aside, the solution goes something like this.

The total amount of money you shelled out included three separate expenses: 1) the pre-tax cost of the item, 2) the tax paid to the state and 3) the tax paid to the county. At this point, we have to switch over to math.

Total Amount Paid = 1 X Pre-tax Purchase Price + .04 X Pre-tax Purchase Price (state tax) + .03 X Pre-tax Purchase Price (county tax)

Then solve for PPP (or find a math teacher and have them do it). You’ll get:

TAP = (1 x PPP) + (.04 x PPP) + (.03 x PPP)TAP = (1 + .04 + .03) X  PPPTAP = 1.07 X PPPPPP = TAP / 1.07

To find out the pre-tax purchase price of the car, divide the total amount paid ($20,000) by 1.07 and you get $18,691.59. That leaves $1,308.41 in taxes.

Since the total tax is 7 percent of $18,691.59, the county tax is 3 percent of $18,691.59 (or $560.75) and the state tax is 4 percent of $18,691.59 (or $747.66.)

To check your work (just like your math teacher told you to), you add back up the pre-tax purchase price ($18,691.59) + the county tax ($560.75) + the state tax ($747.66) and come up with = the total you shelled out ($20,000.)

OK: That's enough math. (Hey, you in the back — you can wake up now.)

Readers with similar accounting puzzles should give them a shot before forwarding along for solutions. We’re really not set up to prepare tax returns at the Answer Desk.