Debunking 'The Recession Is Over' Talk

The Dow touched 10.000 points (inflation adjusted and other factors like the Dollar ripping the 10.000 into a mere 1998 value) and everyone was happy, on Wall Street. The bearish commentators like Nouriel Roubini and Senate Candidate Peter Schiff had to warn again about this fluffy stock market and financial recovery. Across the pond, Germany declared ‘out of recession’, and the ones who still love their Pound more or less start buying houses and other living space again.

The academic declaration for when we are out of this shit is not as clear as when we are in it;

In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for identifying a recession, one of which was “two down quarters of GDP”. In time, the other rules of thumb were forgotten, and a recession is now often defined simply as a period when GDP falls (negative real economic growth) for at least two quarters. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months.

In the United States the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: “a significant decline in [the] economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.” Almost universally, academics, economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession’s onset and end. (Wikipedia)

We should just turn it the other way around I suggest, say when the economy is growing in real GDP (inflation adjusted).

What counts and what not?

Suggested by academics, that we have to include many economic indicators, that when real GDP grows again over several months period then the recession is over, why are we having the ‘recession is over‘ talk when it is clearly not the case? Especially in real terms (inflation adjusted). We haven’t seen a real GDP growth over more than a few months, unemployment is still rising (workers who stop looking for work, 16.8% USA, not even include), and consumers pay down household debt of 124% of their disposable income (USA). With what disposable income do you want to consume?

To make the case for Germany; unemployment hit already +8% and will rise more when government aid for part-time worker, circa 1.4mio in September, runs out. Wages, inflation adjusted, were and are shrinking instead of rising across the whole economy. And unemployment statistics do not include ONE-EURO Jobs, 1.52mio in September.

The ‘green shoots’ talk is overrated, there is still a widening output gap, there is still stimulus spending, there is still rising unemployment. I know that unemployment, aka Main Street, lacks 6 months behind Wall Street gains. And a lot of pundits talk about that and we just have to wait. A 10.000 doesn’t and should not count, with third-quarter-release-number-effects in mind, as sign for recovery. It is vaporware. Period. Media stations and econ pundits were all amazed by the dive the world economy took. We should not have been listening and reading them during pre-storm, and we should not listening and reading mainstream media now.

My Yardstick

A lot has been done to save fragile economies, to a certain degree of success. But we are very far from reaching the finish line. We haven’t even implemented exit strategies. Although the ECB already tries to combat exess liquidity (a correct action).

My measure for economic recovery is much simpler.

When we have started creating jobs, have restored the financial sector in a sensible way to support the real economy and major economies start to pay down their debt by lasting fiscal reforms, then we are on our way to global recovery out of a global recession for the next decade.

It has to be seen if this process (starting with job gains) kicks in in the middle of 2010 or if underlying economic fundamentals (household debt, global trade, financial sector et. al.) can’t be corrected as fast as mainstream medias, econ pundits and politicians wishful thinking. Forecasts aren’t ironed, especially in volatile times.

More hiccups to come as people on the floor have another party.

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+10 Further Readings (incl a vidcast):

• The Big Picture – Wise Words From Economists?
• Financial Armageddon – Bullishness At A Contrarian Extreme
• Financial Armageddon – Getting close To A ‘Recallibration’?
• NYTimes – By Some Reliable Measures, The Recession Is Over
• Reuters – Recession over, unemployment seen at 10 percent
• Bloomberg – Roubini Sees ‘Light at the End of Tunnel’ Of Recession
• Telegraph – Global markets rally is ‘too much, too fast’ (Roubini, Soros, Prechter)
• Wealthdaily – Roubini, soros, Prechter … Oh My
• YouTube – Peter Schiff: DOW 10.000 – So What?
• Business Week – Five reasons it’s too soon to declare the recession over
• DW-World.com – IMF and World Bank warn: Crisis not over yet
• DW-World.com – Slow economic recovery has begun, says IMF