Friday, October 30, 2009

Recession Is Over (Not)


According to the media, the recession we've been in for the past year is finally over. They're basing this on the fact that the nations Gross Domestic Product (GDP), a broad measure of the country's economic activity, was up by 3.5% in the third quarter of 2009. The stock market was so happy with the news that it gained 199 points (the best day in three months).

But don't be too quick to celebrate a return to good times. There are several reasons to doubt the recession is really over -- not the least of which is the fact that the National Bureau of Economic Research, the organization that officially dates the beginning and end of recessions, has not declared it over.

Normally a recession is not declared to be over until there have been at least three straight quarters of economic growth. There was also growth noted in the second quarter of 2008, but the next quarter had negative growth and the recession worsened. So far, there has only been one quarter of growth in GDP. Here is why that growth may not be sustainable:

* The White House Council of Economic Advisors says the federal economic stimulus package is responsible for 3-4% growth in GDP. Since total GDP grew by only 3.5%, it is probable that the entire growth was due to expanded government spending and not to a revival of the private sector. While the federal stimulus was helpful to the economy, a true recovery only happens when the private sector grows.

* Most of the private sector growth was in sales of automobiles and houses -- both spurred by (once again) a government stimulus for these industries ("cash for clunkers" and a tax cut for first time home buyers). There is no real evidence that the public in general is confident enough in the economy to begin spending again in other areas.

* Private industry is still lowering the amount of inventory they keep on hand. Although this depletion slowed in the third quarter, it was still declining. This shows the private sector was actually contracting instead of expanding. True economic growth will not be happening until the private sector begins to expand their inventory.

* While the third quarter showed growth in GDP, it also had a loss of about a half-a-million jobs. As long as the economy loses more jobs than it produces, there will be no real recovery. With each job that is lost, the public has less money to spend and less ability to help stimulate a private sector recovery with that spending.

This is a very shaky recovery at best, and at worst, it may not be a recovery at all. It would not surprise me in the least to again see negative growth in GDP again in the next couple of quarters.

With unemployment still rising, it could be years before this economy is back on its feet. So put the champagne back in the cellar -- we've still got a long way to go.

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