Friday's report showing further deterioration in the U.S. job market adds another piece of evidence that economy is headed for — or has already slipped into — a recession. With housing prices plummeting, energy prices soaring and the job market shrinking, this sure feels like a recession to many Americans.
Yet the government reported Thursday that the economy grew at a 1.9 percent clip in the latest quarter, defying the common definition of recession, which is when the economy shrinks for a sustained period.
How is this possible?
A lot depends on how you choose to define a recession. It’s clear that some industries like housing and auto manufacturing, and regions like parts of the industrial Midwest, are already in a recession. Families struggling with flat wages and rising prices are also feeling the same effects that they would if the entire economy were moving in reverse.
To be sure, some economists believe a recession has already begun. Friday's jobs data marked the seventh straight month of job losses, bringing the total decline to 463,000 so far this year. Some analysts point to the recent rise in the unemployment rate as the strongest piece of evidence. Though still relatively low by historical standards, the jobless rate has jumped by more than a percentage point — from a low of 4.4 percent in March, 2007 to the current 5.7 percent. In the past, that kind of move has been accompanied by a recession.
Thursday's report on Gross Domestic Product added to the debate, after the government revised the results for the last three months of last year to show the economy shrank at a 0.2 percent rate during the quarter. That's the first negative quarter for GDP since the end of the last recession in 2001.
But it takes more than a slightly negative reading in one quarter to make a recession. Some sectors of the economy continue to hold up relatively well.
“Outside of housing and autos, it’s not all that bad,” said David Wyss, chief economist at Standard and Poor’s. “Consumers — despite all the griping about high oil prices and despite the lack of confidence — they're still out there spending their little hearts out.”
That spending got a sizable boost after the government handed out $100 billion worth of tax rebate checks. That money provided an artificial — and temporary — lift to consumer spending, which accounts for about 70 percent of GDP. Without that infusion, the economy might have slipped into reverse by now, say some analysts.
Some economists believe that when those checks run out, consumer spending will likely hit an “air pocket” by the end of the year, increasing the odds of a drop in GDP. Falling house prices are also eroding the home equity that many consumers had been relying on to pay the bills during the housing boom.
The current level of consumer angst is also in part due to the result of a longer-term trend of slower growth in personal income, another key piece of the recession puzzle. Though overall GDP continues to grow, the rewards of that growth have been greater for those at the upper end of the economic ladder than for those at the bottom, who are more affected by higher food and energy prices.
“That’s mainly a matter of an economy that’s demanding higher and higher skills to meet the requirements of the work force — and many people don’t have them,” said former Fed governor Lyle Gramley, now an economist at the Stanford Washington Research Group.
Slow wage growth isn’t the only sign that the economy may be running out of steam. But the other data showing signs of trouble aren’t as bad as they've been in past downturns, said Gramley.
“They’re not going down anywhere near as fast as they normally do in a recession,” he said. “So if we’re in a recession, we’re in one that’s not having the kind of cumulative downward tendencies that we normally do.”
The current downturn is also different than past slowdowns because the rest of the world has not followed the lead of the U.S. economy. That strength overseas has helped maintain strong demand for U.S. products and services, helping to offset weak demand at home. But with central banks around the world raising interest rates to fight inflation, there are signs that strength may be waning. Recent economic indicators in Europe have been pointing to a slowdown there.
While housing prices show little sign of a bottom, the sharp drop in housing construction and sales may soon begin to level off. And the other major drag on the economy — the surge in oil prices — has recently reversed course.
“If you get a big enough drop in oil, that could keep the consumer going and revive the auto market,” said Wyss.
One widely accepted recession definition requires at least two consecutive quarters of declining GDP: The total dollar volume of goods and services falls from one quarter to the next.
But for the “official” dates of a recession, economists generally defer to the National Bureau of Economic Research, a private group that has tracked the ups and downs of the U.S. economy back to 1854. The final call for the start and end of a recession falls to the six private economists who make up the NBER’s Business Cycle Dating Committee.
The committee looks at a variety of data beyond GDP, including employment, industrial production, personal income, manufacturing and retail sales. It’s not unusual for those indicators to point in different directions, according to Jeffrey Frankel, a Harvard economist and a member of the NBER’s recession dating committee.
“If you just looked at the jobs number since January, they’ve been down and that’s clearly the sign of a recession,” he said. “If we end up declaring a recession, it’s still possible that we would date it back to January for that reason because, other than GDP, employment is the second-most important series we look at.”
It’s not the first time the economy has posted gains in the total volume of goods and services produced and still seen other indicators point to a recession. In the 1970s, economists first began using the term “growth recession” to apply to a period where the economy slows sharply and begins flashing signs of a recession without actually moving in reverse. So far, that’s a rough description of current conditions.
Like a lot of economics, pegging the start and end of a recession is not an exact science. Not all economists agree with the NBER’s official pronouncements. Frankel says there was a fair amount of second-guessing and criticism about dates assigned to the last recession, which the committee fixed at November 2001. Because the unemployment rate continued to rise and didn’t peak until June 2003, some economists labeled that period a “jobless recovery,” a phenomenon not unlike the current “growth recession.”
While the debate continues about whether the economy has slipped into a recession or not, the NBER’s dating committee is in no rush to jump into the fray. Frankel says the public often has a hard time understanding why the NBER takes so long to make its official pronouncements.
“When do we finally make a declaration it's always, ‘Well, duh — you’re just telling us what we’ve known for a long time.’ And we’re used to that,” he said. “The point is that unlike everyone else — the pundits and forecasters and commentators who want to be early and declare something before other people — our goal is to be definitive and to not be in a position where we have to change our minds if the statistics get revised the next go around."