Recession Redux – Part 1
it's time to call it what it is. here's why.
2008-02-13
By Donna Johnson and Boyd Klingler
When we decided to write about the state of the economy, the only thing the two of us could agree upon is that we’re on opposite sides of the issue. Are we headed toward a recession, has it already begun, or is this just a period of slow growth in which we’ll be able to skirt an economic downturn altogether?
Since this is the season of debates we’ve chosen to challenge each other on those questions, and since you, gentle reader will be casting your vote from now until November, here are two more idiot opinions about which you’ll be asked to make up your mind.
First the voice of reason:
Boyd, you ignorant slut! It’s now February, but the economic hangover that ushered in the New Year persists. Most economists think that the technical definition of what characterizes a recession is for amateurs. But even if you go along with the two-consecutive-quarters-of-negative-growth description, in six months or less there will be a backward correction declaring what most of us already know—that this Recession began in the first quarter of 2008. So the “now” that’s here will “later on” be stated as “back then.” They don’t call economics the dismal science for nothing.
We should have partied like it was 1999 because the last recession began in 2000 and continued for three years. Overspending on technology by the business sector in previous years led to a pullback in capital expenditure, forced layoffs, wage reductions and other cost-cutting measures. Cheap and non-committal doesn’t only apply to ex-boyfriends.
This time a decline in consumer spending will be bringing the pain, and because the American consumer is 70% of this country’s economic viability, this downturn has the potential to be longer and deeper than the preceding one. (I’ll be more than happy to eat those words if it doesn’t pan out that way). Scarier still is that global economies are dependent on U.S. purchasing activity for 20-25% of their GDP—from your German label Braun coffeemaker to your Japanese brand Sony electronic that’s manufactured in Malaysia. That old saying about when America sneezes, the rest of the world catches a cold ain’t just a cliché.
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It’s not only the housing crisis that’s dragging us into the abyss. Astronomical energy costs, rising health care premiums along with higher deductibles, and skyrocketing food prices are putting a strain on even those households that are able to keep up with their mortgage payments. And with the current credit crunch consumers can hardly be counted on this time to spend what they don’t have. High-end card issuer American Express had to recently boost its reserves to cover a $440 million charge-off for delinquent accounts. Start leaving home without it.
One month does not a recession make, but the economic data for January reveals more than what’s taken place in just the past four weeks. For the beginning of 2008 employers saw a net loss of 17,000 jobs as compared to an expected gain of 65,000. Total job creation for the entire year of 2007 was equivalent to just the first 6 months of job growth in 2006.
Continuing claims for unemployment compensation have seen a gradually rising trend since the beginning of 2007. But the question begs whether this country really needs more jobs or does it need more job training? Some experts say that good labor is not in oversupply. Last month’s motor vehicle sales plunged below their 12-month average to a low not seen since 1999, a further reflection of the consumer credit squeeze. With all of the economic reports, the numbers are down compared to market expectations.
Recessionary pressures are a normal, inevitable part of the economic cycle, but government actions in the form of monetary, fiscal and regulatory policy do matter in taming its length and severity.
When Congress finally gets around to passing the economic stimulus package it will help in the short run, but still too little too late. That said, there is no magic control room for overseeing a $12 trillion economy of 300 million people.
What government can and typically does is come in after the fact and recognize that there is a problem. From there the reaction is to pump money in to avoid the worst, hold hearings to point fingers, and then enact laws to address the blatant fraud and exploitation that occurred. This time the proceedings were spurred by the housing meltdown, although efforts like these are strangely reminiscent of a similar response to the corporate scandals that rocked the stock market and helped the last recession along.
Unhappily, safety regulations and laws are always written in red—ink or blood, meaning after the damage is done.
In our next installment, Boyd responds.
Read Recession: It Might Be WorseDonna Johnson and Boyd Klingler are Giving You the BusinessSM, in an occasional column for EbonyJet.com. Send your business and finance-related questions to our e-mailbag.