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Posted by: Michael Mandel on December 01
Yes, we have been in a recession for a year—even though real GDP is up. The current downturn began in December 2007, according to the National Bureau of Economic Research. The Cambridge-based organization, which traditionally provides the beginning and ending dates of recessions, just announced 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.
I’ve been pretty sure for a while that the recession started in late 2007. Back in March 2008, I predicted on this blog that the official start date of the recession was going to turn out to be November, 2007.
It was pretty clear to me at that point that real GDP—the usual measure of the economy’s output—was giving misleading signals. In fact, even today, real GDP is at its highest level in history, higher than it was at the end of 2007 when the NBER dates the start of the recession (the NBER acknowledges this in their announcement, calling the movements of real GDP “ambiguous”).
Why is this? According to the official statistics, the increase in real GDP was mainly generated by an apparent gain in net exports—that is, a huge shrinkage in the real trade deficit.
In the end, this gain in net exports since the end of 2007 is going to turn out to be mainly imaginary. Supposedly our exports were growing even as the U.S. lost 500,000 manufacturing jobs. In theory that’s possible, in practice it’s very unlikely.
We will look back on this period as a time when globalization outran the ability of the economic statistics to keep track (see, for example, the story I wrote last year titled “The Real Cost of Offshoring”). Part of the reason why we are in this mess is that GDP and productivity growth looked reassuringly high in most of this decade. That helped convince banks to keep lending—even as real wages were falling—and reassured the Fed that everything was okay.
For the foreseeable future, globalization will distort real GDP growth so much that it is no longer a reliable guide for policy. If it feels like a bad slump, it is—even if GDP says differently.
Added: Does the date of the recession start tell us anything about the length of the recession, or the strength of the recovery? In a word, no. The two longest recessions in the post-war era were both 16 months ( 11/73-3/75, and 7/81-11/82). By this yardstick, we are almost done, since we are 12 months into the downturn.
But past performance is not a good indicator. In both cases, the recovery was driven by an increase in housing investment. That’s not going to happen this time. On the other hand, assuming that Obama gets his stimulus plan passed, government spending is going to be a much bigger contributor to this recovery than it was in 1975-76 or in 1982-83.
To me, that suggests a long-lasting recession—say, to the end of 2009—followed by a V-shaped recovery. But I’ll have more to say about that.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.