Chatter about a double dip recession is premature

September 13, 2010
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No one trying to stay up-to-date with news about the economy or financial markets can make it through a day without encountering some reference to a double-dip recession.

A double-dip recession occurs when a recession ends, and then a short time later, a second one begins. The last time the U.S. economy experienced a double-dip recession was during the early 1980s.We were in a recession from January through July in 1980 — a relatively mild six-month recession. But exactly one year later a worse recession began. It lasted from July 1981 through November 1982. If you are old enough to remember the early 1980s, you remember the economic misery. No one wants a repeat of that experience.

The current chatter about a possible double-dip recession raises the level of angst among investors, workers and business owners, and creates psychological barriers preventing us from taking the very actions needed to speed the economy’s recovery: higher levels of spending and business investment.

Yet, who really knows what the future holds? Moreover, who has the final say about whether we are in or out of a recession? It matters. Anyone can spout an opinion, and separating economic beliefs from one’s political, social and religious beliefs is nearly impossible.

Fortunately, determining whether the economy is in a recession is not the responsibility of the president, Congress, or any part of the federal government. Instead, the final word belongs to the National Bureau of Economic Research.

The NBER is a private, nonprofit, nonpartisan research organization whose goal is to further the understanding of how the economy works. It consists of more than 1,000 economics and business professors teaching at colleges and universities in North America (Nope, sorry, none from Grand Valley yet). Collectively, these professors have published thousands of academic articles explaining complexities of the U.S. economy and recommending policy actions.

Within the NBER is a committee whose task is to measure and announce turning points in the U.S. economy. That committee, the Business Cycle Dating Committee, consists of eight NBER economists who determine when recessions begin and end by evaluating several measures of economic activity reported by the federal government.

The current recession began in December 2007. How do we know that? It was the Dating Committee’s conclusion. In order for the U.S. economy to suffer a double dip-recession, the Dating Committee first must declare an end to the December 2007 recession. Then, shortly thereafter, a second recession must begin.

Identifying turning points in the U.S. economy is no simple matter. Often, it isn’t clear a recession has ended until long after the fact. For instance, the U.S. experienced a nine-month long mild recession from July 1990 through March 1991. However, because economic growth after March was so slow, the Dating Committee wasn’t able to determine the recession had ended until November 1993 — 21 months after the fact.

The most widely used definition of a recession is two consecutive quarters of declining GDP adjusted for inflation. In other words, the inflation-adjusted dollar value of the economy’s output of goods and services falls for two consecutive quarters. A problem with this definition — a definition any student in a beginning economics class can rattle off without hesitation — is that the Dating Committee doesn’t use it. In fact, the Dating Committee doesn’t use any specific definition or formula for determining whether a recession has begun or ended.

Rather, committee members evaluate a variety of economic statistics and use judgment and experience to reach their conclusions. For example, in addition to real GDP, the committee considers employment levels (and, therefore, unemployment levels), real (inflation-adjusted) income levels, business sales, the level of industrial production and many other relevant factors.

As a consequence, it’s preposterous for any economics commentator to say the December 2007 recession has ended, or hasn’t ended. It would be accurate to say only that the recession may have ended, or may still be going. Only pronouncements by the Dating Committee carry any weight because the committee makes the call.

In addition, unless the rate of economic growth picks up steam, it may be a long time before the committee will be confident enough to announce that the current recession has ended. GDP grew by only 1.6 percent in the second quarter compared with 3.7 percent in the first quarter and 5 percent during the last five months of 2009. Clearly, the GDP growth rate — an important indicator used by the Dating Committee — is slowing, providing evidence that the 2007 recession may not have ended.

Consequently, talk about a double-dip recession is nonsense. Such talk presumes the December 2007 recession ended when GDP growth increased last year. But the unemployment rate is still high and the real estate industry still seems to be in a depression. Accordingly, we might be in the 34th month of the December 2007 recession. We’ll know the answer only when the Dating Committee tells us. Don’t hold your breath, because the announcement could be a long time coming.

Humorists define economists as people who steer their cars by looking into the rearview mirror. In other words, economists observe the past and use what they’ve learned as a guide for future policy. That works well until the road ends at a cliff. Right now, many people feel the U.S. economy is approaching that cliff. They see a few economic indicators slowly improving, suggesting the recession has ended or soon will.

Yet other indicators — especially in the real estate sector — suggest the economy is heading in the wrong direction, suggesting several more months of recession. Only time will tell what really is happening. In the meantime, let’s stop the talk about a double-dip recession. We don’t even know whether the December 2007 recession has ended. Instead, let’s concentrate on new ways to stimulate economic activity other than by borrowing money from the future and spending it in nonproductive ways.

Dr. Gregg Dimkoff is professor of finance and director of the certificate program in financial planning at Seidman College of Business, Grand Valley State University.

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