MOUNT VERNON — Almost everyone knows the economy is not in the best of health of late, and consumers are feeling the pinch at the gas pump and the grocery store. The word recession is used virtually everywhere, but there are conflicting opinions as to when or if a recession will start and if so, how long it will last.
To try and answer the question of how well the national economy is doing, analysts use a set of reports called the national income and product accounts. Produced by the National Bureau of Economic Research, NIPAs include gross domestic product. GDP is the value of all goods and services produced in a given time period. The definition of a recession is a decline in GDP for two or more successive quarters.
What it all means in layman’s terms, according to Dr. David Skinner, professor of finance at Mount Vernon Nazarene University, is a recession “is a significant decline in economic activity across the economy.”
The problem, said William Melik, professor of economics at Kenyon College and a former member of the Federal Reserve, is that determining a recession is always a backward-looking process.
“The GDP is released quarterly,” said Melik. “Only on Jan. 31 will there be a release of the fourth quarter [2007] GDP. We could be in a recession now, but we won’t know if GDP is declining until the end of April.”
Even then, he said, the numbers could be revised, and it could take months before a final quarterly GDP is reached.
The formal process of determining whether or not the country’s in a recession takes at least six months. There are, however, signs which can help individuals judge which way the economy is going. One of those is the unemployment rate.
In a recession, said Skinner, unemployment tends to rise.
“Economists used to think anything lower than 6 percent unemployment, and we’d be great,” he said. “Now, after several years of 4 to 5 percent ... it’s maybe toward the high end of what we’ve been used to.”
Figures released Tuesday show unemployment rates rose in December. In Knox County, it went from 5.3 percent in November to 6.1 percent. Statewide, it went from 5.6 percent to 6 percent; national numbers will be released today.
Another sign of a recession, Skinner noted, is a decline in prices. He cited the example of automakers who are unable to sell vehicles without giving a rebate.
Melik agreed.
“When commodity prices decline, it’s a sign that demand is starting to fall,” he said. When demand falls, it means consumers aren’t buying, which, in turn, is a decline in economic activity.
Industrial production is another popular number to look at, Melik added, as is a decline in equity markets.
“The stock market correctly predicted nine of the last 12 recessions,” he said.
“Some people look at the spread between short term and long-term interest rates to get an indication whether the country is moving into a recession,” he added.
Skinner said another sign of a recession is when the value of assets falls, such as housing. Although, he added, typically the houses are overpriced to begin with.
Although most economists agree the United States is either entering into or is already in a recession, there is less agreement on how severe, or how long, it will last. Economists at Goldman Sachs say it will be a mild one, lasting six to nine months. Robert Brusca, chief economist for Fact and Opinion Economics, said Wednesday on National Business Report that the country may even miss reaching the definition of a recession.
Nouriel Roubini, president of Roubini Global Economics and an associate professor of economics and international business at the Stern School of Business, New York University, predicts a recession more severe than 2001, lasting at least a year.
“I don’t think it will get that bad,” said Melik. “The U.S. economy is huge and dynamic.
“I don’t think there’s a fear that policymakers are sitting on their hands,” he added.
Melik did say there may be some churning within sectors, and it may be a while before a rising sector takes on employees who were laid off in a declining sector.
Bob Bronson of Bronson Capital Markets Research, writing for Financial Sense online, believes the country is already in a recession. According to Bronson, the GDP does not contain “crucial employment data, and is not the best measure of the business cycle.” He said if one looks at the part of GDP that does reflect the true business cycle, “the business cycle portion of NIPA data has been contracting for the past eight quarters.”
According to Bronson, using the business cycle numbers, the last recession lasted from October 2000 through March 2002; 29 months, compared to the nine-month recession in 2001 as stated by NBER. If the current recession continues to develop as it has been, Bronson said it will likely persist for longer than 29 months, and “will be ultimately perceived as severe, if not very severe.”
Skinner is more optimistic.
“We may have a mild [recession,]” he said. “An economy that has lots of services has less chance of a recession.”
He said the public has a misconception that a service-based economy is flipping hamburgers in a fast-food restaurant. Although it does include those types of jobs, he said, it also includes managerial and technical services, and professions such as law and medicine.
MOUNT VERNON — According to talkgold.com, the United States’ last experience with a recession was in 2001. Prior to that, there was a recession in the 1990s, in 1981-82, 1973 and 1979. There have been a number of recessions since the first major financial crisis occurred in the United States, the Panic of 1819. These recessions have lasted anywhere from eight months (1957-58) to the Great Depression, which lasted from 1929 to the late 1930s.
“The last recessions we’ve had since 1991-92 have been mild and almost unnoticed,” said Dr. David Skinner, professor of finance at Mount Vernon Nazarene University. “This reduction in recessions, both severity and length, is called ‘The Great Moderation.’”
According to Skinner, Ben Bernanke, chairman of the Federal Reserve, said there are three reasons recessions have been few and mild since 1984: Structural changes, economic policies and luck.
Under structural changes, Skinner said one of the big things is inventory control.
“Big box stores and shipping companies have used increased technology and communication to reduce the need for large inventory,” he said.
What is being used now is just-in-time inventory.
“Before,” said Skinner, “if sales declined just a little bit, suppliers shut down and people were out of work. With just-in-time inventory, minor adjustments are made every day. This reduces the impact on the economy.”
There’s no warehousing now, he added. Trucks delivering product and shipping product are schedule to arrived at the same time, and there is no need for inventory.
Under the economic policy category, Skinner said the Federal Reserve has learned from the past and knows what to do.
“You fight a recession with a lower interest rate,” he said, which is what the Fed did Tuesday when it lowered interest rates by three-quarters of a percent. “Because during a recession, people tend to think they might lose their job, so there’s no borrowing and no buying.”
Lower interest rates, he said, encourages people to borrow and buy, thus stimulating the economy.
The third area cited by Bernanke, luck, is what it implies.
“In the 1970s,” Skinner said, “we had an Arab oil embargo. Regarding major economic catastrophes, we’ve had nothing serious like that for a while.”
If a recession is long and severe, it goes into a depression, Skinner said, which is what happened in 1929-39. In a depression, the unemployment rate is around 25 percent to 30 percent, far higher than the 5 percent the United States has been recently facing.
As an aside, Skinner said the term hobos was coined during the Depression, stemming from the large number of men who were out of work. The men would take a hoe, tie a bandana filled with supplies on the end of it, and walk from town to town, looking for work. The original term was hoe boys, he said.
An economic collapse is worse than a depression, said Skinner.
MOUNT VERNON — Even though the country is entering, or is already in, a recession, there are a few things which can be done on an individual basis. Dr. David Skinner, professor of finance at Mount Vernon Nazarene University, said individuals should consider carefully whether or not the car or washing machine has to be purchased now, or whether the purchase could be put off for another year.
“Not getting overextended is one of the best things a person can do in case of a recession,” he said.
Another is having some liquid cash. However, he said, this needs to be done ahead of time.
“If you have not already done it, it’s too late,” he said.
Consumers can also shift their buying habits, said Skinner. For example, going from a higher-priced item to a lower priced item. Other suggestions include cooking meals at home rather than eating out and lowering the thermostat by 5 degrees to conserve fuel.
However, if all consumers followed these guidelines, the country could fall prey to what he called the “fallacy of composition.” The fallacy of composition is the line of thinking “if it’s good for me, it’s good for everybody.” But, said Skinner, if everybody holds off purchasing, it can actually cause a recession, which is defined as a lack of economic activity.
Skinner said the real sentiment, on an individual basis, is, “it’s good for me to be frugal ... but it’s not good for you to do it.”
William Melik, economics professor at Kenyon College and a former member of the Federal Reserve, also offered some advice for consumers.
“Now is not the time to do some massive reallocation of a retirement nest egg in response to a short term event,” he said.
In addition, he said, people need to remember they may not have a lot of control over what’s going on. For example, he said, although layoffs will be painful, it’s not something an individual can control.