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Five reasons it's too soon to declare the recession over

Posted by: Peter Coy on July 15

Guest blog from Economics Editor Peter Coy

Daniel Gross wrote a column yesterday called “The Recession Is Over!: What America’s best economic forecaster is saying.” Gross, the Moneybox columnist for Slate and the business columnist for Newsweek, cited the conclusion of Economic Cycle Research Institute managing director Lakshman Achuthan that “the recession is ending somewhere this summer” and in fact may already be over.

Here are five reasons to think the recession is not over and, contrary to Achuthan, GDP has further to fall:

UNEMPLOYMENT: Consumers won’t start shopping again in earnest as long as the unemployment rate is at 9.5% and threatening to break into double digits. People who are out of work can’t spend, and people who fear being out of work won’t spend.

SPARE CAPACITY: Companies won’t hire or buy equipment as long as they have lots of slack. Today’s industrial production report revealed that the U.S. industrial capacity utilization rate fell in June to 68%, the lowest since recordkeeping began in 1967. World Bank Chief Economist Justin Lin said today in South Africa that unless global overcapacity is reduced, “we will face a deflationary spiral and the crisis will become protracted,” according to Bloomberg.

DEBT: As I’ve written, household debt soared from two-thirds of GDP in the early 1990s to 100% at the end of 2008. Simply getting debt back to three-quarters of GDP, the level of 2001, would require paying off 25% of all outstanding household debt, $3.5 trillion worth. Paying down debt gets even harder when GDP is falling—that’s Keynes’s paradox of thrift.

BOND VIGILANTES: If fixed-income investors get nervous that the government’s massive deficit spending will push up inflation, they will sell bonds and drive up interest rates. That would be a huge setback for homebuying, car sales, and other rate-sensitive sectors.

DOUBLE DIP: Even if the gross domestic product rises in the current July-September quarter—and it might—output could very well fall again in the fourth as the effects of the stimulus tax cuts begin to fade.

Link to a video I did about today’s industrial production and consumer price reports.

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Reader Comments


July 15, 2009 02:32 PM

I have personally been forecasting a stagflation environment by end of 2009 through 2011. And a 10%-11% unemployment rate by mid 2009. And that forecast was done back in mid 2008.


July 15, 2009 03:09 PM

Good article. Many economists still think consumer spending will drive a recovery. It will not. Consumer spending is still at an unsustainable level vs. GDP. The baby boomers are reversing their spending trends and are now saving for retirement and paying down debt. Younger workers do not have the same buying power as their parents because immigrants and outsourcing have weakened the job market. Government spending could drive the economy, however it too is unsustainable, will require deficit spending and doesn't generate very many jobs vs. the cost. That leaves business investment, which will not happen until existing capacity is utilized and the future outlook improves. Even when businesses do start investing again, it probably will not be in the US or Europe.


July 15, 2009 03:24 PM

You know it's not a normal recession when you can easily list 5 more reasons in addition to this list. Others that come to mind include an end of a cycle for commercial construction, energy rebound, state govt, Europe, and tax threats. A long recession invites more and different sector problems to pile on, increasing the risk of no growth or effective double dip. No one has models tuned for this type of recession, including the Fed.


July 15, 2009 03:25 PM

The 5 things are all LAGGING indicators of the economy. In addition to unemployment being the last statistic change (hesitant to fire, even more hesitant to hire).


July 15, 2009 04:27 PM

This recession ends when the tech boom begins, later this year. Most of the household wealth lost in the last year was in equity markets, not housing, meaning that it's mainly a loss of sentiment. People don't know where the next growth story is coming from, so they tighten their belts. That's actually a good thing as they were spending too much recently, but they'll be fine when tech takes off again.

Keith G

July 15, 2009 05:12 PM

If the current stimulus is only 10% spent in July and really kicks-in in the fourth quarter. Why wouldn't that make for a better fourth quarter than third quarter? Are consumers going to reduce spending by more in fourth quarter than the stimulus kicks-in?

Ozer Khalid

July 15, 2009 05:30 PM

Growth, if at all, will be anemic in 2010 and beyond. The shadow banking system has evaporated, traditional commercial banks are trillions of dollars in the red on loans and securities while being plagued by undercapitalization. So the credit crunch will not easen soon.

Weak profitability, augmenting default risk, low revenue growth, and persistent deflationary pressure (hastened by slack product and labor markets) incessantly restrict firms’ willingness to invest.

Rising government debt ratios and catapulting interest rates will choke out private spending and give defective birth to sovereign refinancing risk.

If central banks don’t orchestrate a comprehensive exit strategy from policies that triple the monetary base, inflation and other malignant asset and credit bubbles will reign supreme.

Recent rises in the prices of equities, commodities, and other risky assets are perilously liquidity-driven.

Weak emerging-market fundamentals, alarming Capex on balance sheets, and the resulting lack of global demand relative to supply – or, the surplus of global savings relative to investment spending – will puncture the tyres of a swift market recovery.

Ozer Khalid
(A former Investment Banker at the Bank of America, The Bank of New York Mellon and Citigroup).

Magdalena Szarafin

July 15, 2009 06:39 PM

What about the forecasts saying about -6% growth in 2009?

Magdalena Szarafin

Blake Southwood

July 15, 2009 06:56 PM

The US Economy is in the second Great Depression.
It's getting worse each day.

There are NO JOBS!!


July 15, 2009 07:27 PM

According to Strategery "Younger workers do not have the same buying power as their parents because immigrants and outsourcing have weakened the job market" I will like to see evidence of that, otherwise is just... I am sure that there are other factors that can explain better it; please do not speculate show evidence.


July 15, 2009 07:46 PM

'Economic Cycle Research Institute'... I hear they use the chicken entrail method of prediction


July 15, 2009 07:50 PM

No mention of the growing delinquency and foreclosures on 'prime' mortages. If this does not stabilze real soon...well fasten your seat belts and brace yourself bridie.


July 16, 2009 03:55 AM

gee u guys paint a dismal picture - perception of gloom often turns into reality = crap economic outlook ...lighten up and try and be positive!

Sanjeev Kumar

July 16, 2009 06:17 AM

The message from this global financial crisis is loud and clear; the system that we currently have is flawed, susceptible to produce crises and prone to systemic risk.

Going forward the folks on the main street will also have to realize that if you keep eating without maintaining a strict regular healthy diet and exercise regime you would most probably end up accumulating excessive fat and there is no point blaming other for it. We know all what pain some folks have to go through to shed the excesses. The question is why go through that pain especially when people are able to maintain a good health by following a regular healthy diet and exercise regime. There has to be a realization that the era of excess is gone.

The consumers (especially the American and British consumers) will have to learn to save more and live within their means. We are beginning to see that folks on the main street are starting to save a little bit more. Which is a good news but in the short term it also means that consumers will tend to hold their cash pretty close to their chest and against this back drop it’s hard to envisage a rapid pick up in consumer spending on the level seen in 06 or 07.We are not done with volatility yet. We are going to see more mixed data come out in the next quarter which will probably swing the markets both ways. The hope is that the investors will not loose foresight and look at the story behind the numbers and not get carried away by sheer sentiments like seen in the past

I’ll happily sacrifice a rapid recovery that could easily falter to a sustainable one. A healthy and sustainable economy will mean more businesses starting-up or expanding, more hiring, increase in trade and the certainty about the future.


July 16, 2009 01:35 PM

I for one would appreciate some honesty from our politicians and policy makers about our current situation.We will not get back to the prosperity of the last decade for at least a decade,because even as we return to some positive growth,the earnings from that will go to pay back the 3.5 trillion that Mr. Coy said we overspend since 2001.only when that has been repaid,can we start resuming growth in personal consumption,but even then,assuming we will have learned to live within our means,will prosperity growth seem tepit compared to the last decade,as it was fueled by massive borrowing.In other words,we should all get used to working harder for less,but in the long run it will be good for us as individuals and the country as a whole.Anyone who thinks that the current spending spree by the politicians in Washington DC,will help,is drinking too much coolaid!!It will simply prolong the problems and saddle future generations with trillions of additional debt!!


July 16, 2009 02:56 PM

well Freddy B, there have been many studies based on tax records that show that current incomes are not higher than they were in 2001, and are headed soon to less than 2000. while jobs are now less than they were in 2001. its easy to tell. ask some one in the younger age group. you can also tell by who buys the most goods. ex. cars. almost all of then have been bought by boomers. and have been for a while now. and while i don't expect jobs to come back any time soon. it didn't seem to stop those back in 2003 from claiming victory over that recession. but it will not help you this time around. consumers have cut back permanently just like business has back in 2001


July 16, 2009 03:20 PM

I work as an architect, from my perspective the recession is as bad as ever. Talking to major commercial contractors and other architects, there is no new construction being planned. Sure there are little things, but window replacement and a new $2500 furnace from the much touted energy tax rebate hardly staunches the bleeding. Clients do not want to invest in infrastructure right now when foreclosures are way up, and their property values are way down. And when they finally do it is going to be 18 months before someone like myself gets those specifications done and through gov. review. So maybe, at the shortest possible time frame it is going to be 2 years before shovels start digging and construction restarts.
So is that a leading or lagging indicator of the state of the economy?


July 16, 2009 03:37 PM

Vishnu - are you for real? Seriously? People should pretend everything is great, and it will be? *sigh*

I'm afraid reality is finally beginning to sink in, as it must. One cannot solve a problem, if one pretends there isn't one because...well, that would just be depressing. Reality isn't depressing. It simply IS. Now if you prepared for this mess even in minor ways the past 2 years, barring losing one's job, you are okay. If however, one took Vishnu's approach and simply pretended nothing was wrong, you are likely pushing a shopping cart and living out of a cardboard box. Let's Pretend is a neat game for little children. Doesn't work so well for adults, dealing with real problems, bills, responsibilities. Until there is recovery in jobs, there will be no real recovery...not for taxpayers. I'm strapped down and prepared for the long haul, and not at all depressed about it, either. Being realistic about the world is the best way to ensure solid ground to stand on.


July 16, 2009 05:44 PM

So Jim Crammer and Fast Money "Professionals" Are Lying??!

Crammer yesterday: "Buy and Hold Financials!!"

Fast Money some Weeks ago: "Now the bull market resumed, get into the market for the long ride up"

These guys are almost like criminals.


July 16, 2009 06:14 PM

Amen Marcy.

@Fredy B:

Fourty years ago a family had one parent working and could pay off a mortgage and raise 2 kids. Today, this is a difficult proposition even with 2 parents working.

The median income (50% above, 50% below) has not changed since 1972 even while the upper 10% has quadripled their net worth.

The econometric data that justifies Strategery's statement -- "Younger workers do not have the same buying power as their parents because immigrants and outsourcing have weakened the job market" -- is well-known and is commonly accepted. (Read Kevin Philips book). Go look it up yourself using the government income data.

Belittling the truth by pretending it isn't justified by accepted facts you refuse to acknowledge is not the scientific method.


July 16, 2009 09:49 PM

dw: "you can also tell by who buys the most goods. (...) boomers. and have been for a while now."

That's because boomers are an exceptionally large cohort, and have been in their prime spending years "for a while now".

Anything the boomers are doing at scale will be an almost majority phenomenon, pretty much by definition.


July 16, 2009 10:36 PM

And so if people can't or won't spend, companies will remain slack and the economy will never recover.

Fortunately, comments like yours are proven wrong time after time and so therefore we're actually here and reading this. Hmmmm, maybe we should focus on the good things instead! :)


July 17, 2009 12:16 AM

You donot need actual vouchers or coupons to partipate in this program. All dealers are required and government will
reimburse the fees for the clunkers


Mary Dyer

July 19, 2009 08:02 AM

I am continuing to drive my "clunker" because it is paid for. The last thing I need is monthly payments for anything. If and when I can pay cash for a replacement for my "clunker" I will continue to drive it, or find car pool alternatives if it quits working.

what ever my Clunker is, I own all four wheels, with no future committments for monthly payments in todays uncertain economy. I own everything I have, free and clear, and debt free is a status I plan to contune in the forseable future. The goverment doesnt get it. Debt is a trap, and smart people avoid it if at all humanly possible.


July 19, 2009 01:01 PM



July 20, 2009 01:53 PM

Amen Mary D., my clunker is also paid for. It is illegal for me to print money and irresponsible of me to take on more debt as in Congressional use of riders and any number of handouts of money they don't have. I'll make it as long as they don't outlaw the home and family too. I say that softly because all of Clinton's supreme court picks voted in the majority opinion to agree with imminent domain for use by government for purposes of other private use development. Also, 10 years of "who could have known" cost overruns in mandated health care program costs could effectively put us all out on the streets. All of that is in addition to the massive unfunded mandate in Medicare and SS. Those clunkers will start to look like 1950s relics on the streets of Havana at this rate.

Thank you for your interest. This blog is no longer active.



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