It’s Official

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The Lehmann Letter ©

Today the National Bureau of Economic Research announced (http://wwwdev.nber.org/cycles/dec2008.html) that “…a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.”

So there you have it. It’s official. We’re in a recession and have been for a year, despite the Bush administration’s reluctance to pin a tail on that donkey.

The Bureau justified its position by defining recession and employment’s key role in determining whether or not the economy is in recession:

“A recession is a 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. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

“Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

“The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.”

“The Bureau believes that the decline in employment is the best evidence of recession.”

How long will the recession last?

Let’s ask Federal Reserve chairman Ben Bernanke. In a speech delivered today (http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm) he said, “…the U.S. economy remains under considerable stress. …economic activity appears to have downshifted further in the wake of the deterioration in financial conditions in September…economic conditions will probably remain weak for a time. In particular, household spending likely will continue to be depressed by the declines to date in household wealth, cumulating job losses, weak consumer confidence, and a lack of credit availability.

“The global economy has also slowed. Many industrial countries were affected by the financial crisis from the beginning, but the latest economic data point to a more noticeable weakening of conditions. And emerging market economies, which were little affected at first, are slowing now as well. One implication of these developments is that exports are not likely to be as great a source of strength for U.S. economic activity in coming quarters as they had been earlier this year."

This recession will be a long one. It’s already a year old and there’s no end in sight. Quite to the contrary, it appears that conditions will deteriorate further before they improve.

Will this recession be the worst recession since the Great Depression of the 1930s? For that to occur, using unemployment as the single gauge, the unemployment rate would have to exceed (slightly more than) 10%, the level it reached during the 1981-82 recession. In October the unemployment rate was 6.5%. We have a ways to go. Let’s hope we don’t arrive.

© 2008 Michael B. Lehmann