Economists Debate: Where is the Recession?

August 8th, 2012
in econ_news

Written by Jillian Friesen, GEI Associate

Econintersect: There has been much in the news pertaining to our near miss of an economic recession. Many revered economists have a different view of the economy. recession-recovery-street-signs-with-manSMALLIn an early news post,  Economist John Hussman predicted a coming U.S. recession predicted to hit in mid 2012. Hussman along with other economists hold strong on their positions. Others hold the belief the United States is in the clear. This debate over current conditions in the globabl economy is a current hot topic in economic news.

By definition, a recession requires at least two consecutive quarters of negative real GDP. NBER defines is as, "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators."

Follow up:

The National Bureau of Economic Research (NBER), which is the official authority on when recessions begin and end, recently added four new key economic indicators to its description of a recession: industrial production, payroll employment, inflation-adjusted personal income and volume of sales in the manufacturing and trade sectors. The fact these indicators are labeled as "lagging" suggests we may be fully immersed in a recession before the indicators light up. Once we see the numbers, it could be too late to predict what is coming.  Whatever it is will likely already have arrived..

The writers at came up with a list of their own recession indicators: slower consumer spending, inverted yield curve, rising unemployment and inflationary pressures.

Industrial production is considered the first key economic indicator to look at when trying to spot a recession. This indicator measures the output of a certain nation's economy. During the crisis in 2008, American GDP was in the red. Now the U.S. is growing slowly. The Fed is predicting growth of between 2-2.3% this year. Even if America managed to double this number to 4%, it would be less than 30% of where were were prior to the "first" and most recent recession.

Payroll employment is the second indicator to look at. Studies suggest that there is a shortfall in jobs needed to fulfill the potential growth in the labor force through 2012. These numbers are alarming. Below is a chart outlining this information.

Source: State of Working America

Source: Hussman Funds

Recent headlines have covered the topics of the jobless rates for this summer. So far the jobless rate has increased in July to 8.3% from 8.2% in June. Right now it would appear the economy is not producing jobs quickly enough. Many also worry the numbers released by the Bureau of Labor Statistics may be skewed.

"But digging deep within the July job numbers, I see the Bureau of Labor Statistics states that the expected 13,000 seasonal layoffs in the automobile industry did not occur in July, which it believes is a temporary situation. What this means, dear reader, is that the job numbers were skewed higher by 13,000 jobs because the Bureau of Labor Statistics expects these layoffs to occur in the not-too-distant future.

In addition, temporary work, and hiring in the food services and drinking places—the low-paying jobs—accounted for almost 29% of the job numbers gain seen in the month of July."1

Roughly 86.8 million working age people were not included in the numbers released by the BLS for those "in the labor force."

Personal income (adjusted for inflation) is the next indicator, is linked closely with the three other indicators. Manufacturing and trade sales is the last of the four major economic indicators. U.S. corporate earnings are plummeting quickly.

There are however many positive signs indicating the economy is not going to go down the same recessionary path we saw in 2008-2009.

In the Fed's latest survey on lending, the information showed lending standards have loosened, indicating the economy will favor expanding over contracting within the next few months. The August employment report will be released by the Fed September 7th and the next Federal Reserve meeting over policy decsions will take place September 12th and 13th.

In a report from Wells Fargo Advisors:

"After last week's Fed meeting, policymakers announced that they are monitoring incoming economic data and will provide further accommodation as needed. This was a more direct pledge to increase stimulus than the Fed indicated in June when it said that it was prepared to provide more stimulus. Of course, the Fed did not say exactly what it would do or when it would be implemented. Therefore, investors will be watching the incoming economic data closely, just like the Fed, to determine what action the Fed may take."2


It will be important to see the actions taken by the Fed within the next few months as well as the activity in the Eurozone. The U.S.'s GDP exposure in this part of the world is only 2%, however 25% of the U.S.'s foreign exposure in the banking sector is located in the Eurozone. Below is a chart outlining the relationship between the Flash Eurozone Purchasing Managers Index and GDP. This relationship exhibits some of the weaknesses seen in dominant components of U.S. market data.

Source: Hussman Funds

Chart outlining global manufacturing output:

Source: Hussman Funds

For now, whether or not we are still in a recession is anyone's guess. However the Global Economic Intersection EEI (Econintersect Economic Indicator) does not project a recession starting in the current month or in September.

Along with John Hussman those who believe we are starting or are already in a recession include ECRI (Economic Cycle Research Institute), which has an outstanding recession calling record.  Still others, like GEI, do not think a recession is about to start right now.

Econintersect Note: There have been 12 recessions between 1945 and 2007.  That is one approximately every five years.   There has been one recession free period of ten years (March 1991 to March 2001) and another of almost ten years (November 1982 to July 1990).  To remain compatible with the 62-year history there is very likely to be a recession starting sometime between June 2014 and June 2019 or before.

Half of the recessions (6) have started in 45 months or less after the end of the preceding recession.  To stay within that historical pattern means that there would be roughly a 50% probability of having a recession start within 45 months of the end of the previous recession, which is by March of 2013 in this case.  Most of the prognosticators, whether yay or nay, would be able to claim victory if that were to happen.  Calling a recession in advance within six months is generally considered to be a good call, and some would stretch that window to nine months.

John Lounsbury contributed to this article.



1. Profit Confidential: Number of People Not Working Hits Second Highest Level Ever Recorded

2. Wells Fargo Advisors: Where's the Growth?

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