- The Washington Times - Friday, August 7, 2009


There has been much speculation that the economic recession is over. Just wishing it to be so or repeatedly saying it is so does not necessarily mean that is the case. At the heart of the matter are two simple questions — What exactly defines a recession? Does something not getting worse mean it is getting better?

First things first; let’s be sure we are on the same page as to what a recession is. The classical definition is two consecutive quarters of negative economic growth as measured by gross domestic product (GDP). Using this definition, we have plainly been in a recession. A recession can also be defined as a significant decline in activity across the economy, lasting longer than a few months and visible in industrial production, employment, real income and wholesale-retail trade. Using this description, there is no measurable yardstick that says all four of those indicators need to be used but rather they are visible signs of a recession.

Regardless of which definition is used, I think we can agree we have been in a recession for the last year. In terms of where we stand today, that is far less clear in my opinion.

Have some of the data appeared to have improved during the last few months? Yes.

Is that improvement widespread? No.

Is the life engine of the domestic economy improving? This is where it starts to get tricky — and when things get tricky, I find it best to break them down into digestible and understandable pieces.

On the one hand, there are signs that a bottom has been reached in the manufacturing economy. In June, we had the seventh straight monthly increase in the Institute for Supply Management’s manufacturing index. The index reading in July was 48.9, up from 44.8 in June. While that sounds positive, and an improving trend is indeed favorable, the issue at hand is that an index level below 50 is indicative of a contraction. In this case, things are not getting worse, but not necessarily getting better yet, which historically has indicated the end of the recession is near for manufacturing.

Last week, government statistics showed the economy improved in the second quarter rather nicely compared to the first quarter, as evidenced by domestic GDP. Growth in GDP fell at an annualized rate of 1 percent, a decline less steep than expected, although data for the first quarter were revised to a larger 6.4 percent drop. Again, a positive sequential improvement, but peeling the onion skin back on the data reveals that negative contributions from personal consumption expenditures (PCE), residential fixed investment, private inventory investment, and exports were partly offset by positive contributions from federal government spending and state and local government spending. In other words, the private sector contracted more than the reported data would suggest.

Earlier this week, it was reported that consumer spending climbed in June. Remember that consumer spending accounts for about 70 percent of overall domestic economic activity. Again, digging deeper we see that the rise in consumer spending for the month was largely driven by higher gas prices. U.S. Energy Department data show retail gas hit a 2009 peak, at $2.69 a gallon, the week ending June 22. Adjusting for this, consumer spending contracted.

The point here is it’s as important to look at the underlying data as much, if not more so, than the headline.

Perhaps the more interesting and intertwined conundrums are the savings rate, personal income, unemployment rate and jobless claims. It’s no secret that the unemployment rate has been rising, and given ongoing jobless clams as well as indicators like the ADP employment report, it’s rather likely the unemployment rate will continue to climb. Just this week alone, the consensus expectation for the ADP employment report was a loss of 350,000 jobs; the report came in at a loss of 371,000 jobs. Granted, it was better than the prior month that saw a loss of 463,000 jobs, but the July data were not as good as was expected.

With that as a backdrop, it is rather easy to understand why personal income levels fell in June. In fact, the income of Americans took the largest tumble in four years during June. At the same time, the June unemployment report from the Labor Department revealed the average workweek for production and non-supervisory workers on private non-farm payrolls fell to 33 hours — the lowest since records began in 1964.

Summing all of this up, it’s not too hard to piece together that consumers are scared about their near-term prospects. Yes, the manufacturing economy may be getting better as appears to be the case for the auto industry and the housing market. This is not, however, an “if you build it, they will come” time for consumers, particularly since nearly 15 million Americans are out of work and close to 1.5 million are close to seeing their unemployment benefits expire. Is it surprising then that consumers have cut their spending and are actually saving their disposable income?

No, it’s not and we should expect the consumer to be more like a deer caught in the headlights when it comes to spending near-term. Until the average consumer sees evidence of an improving labor market and has some degree of comfort about his or her economic outlook, the vast engine of the domestic economy - consumer spending - is not likely to fire on all cylinders. If we cannot get back to the stretched style of economic living of recent years, and probably we shouldn’t, it’s not hard to envision a dramatically different economy characterized by fewer jobs and more restrained spending.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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