Al's Morning Meeting

There seems to be a growing agreement among economists and bankers that we may already be in a recession and that if we are not, we will be soon. Journalists would do well to ask: What does a "recession" mean? Are recessions normal? Who decides if we are in a recession? And, how do we get out of a recession? What is the difference between a recession and a depression?

Recessions are a normal part of the economy

As the old saying goes, what goes up must come down. Economies expand and contract. It is part of the normal economic cycle. The U.S. economy has gone through several recessions. Most are short-lived and are followed by a new growth spurt. At the moment, economists predict the recession of 2008 will be fairly short. For some, however, it will not be painless. Long and deep recessions are called depressions. (More on that later.) The last recession was in 2001. The economy contracted after 9/11, ending a 10-year expansion. But gradually, as consumers started spending and producers started producing stuff again, the economy started growing.

HowStuffWorks explains:

What is a recession, and who determines if we are experiencing one?

For starters, a recession is a protracted slowdown in the economy. It is not a little blip in the stock market or a single unexpected bad unemployment figure. Usually, economists say the slowdown has to extend at least six months. There are exceptions, but that is a good rule of thumb.

The committee that determines when we are in a recession (more on that in a minute) identifies a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession -- a period when the economy is contracting. The following period is an expansion.

A recession is not a slump. A recession is not protracted or deeply disturbing to the economy. There are usually a number of elements to a recession that affect some part of your local economy, including:

• People buying less stuff (retail decline).
• Decrease in factory production.
• Growing unemployment (last week's news that unemployment climbed to 5 percent was a big tipoff that we may be in or near a recession).
• Slump in personal income.
• An unhealthy stock market.

If you want to get technical about it, the true definition of a recession is usually defined as two consecutive quarters (a quarter is three months, so, six months total) in which the gross domestic product (GDP) decreases. The GDP is all the goods, services and products a country manufactures or produces. The GDP is determined by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.

It is not the government or journalists who determine when we enter a recession. It is a nonprofit group of economists called the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER). This organization includes economists, professors and others who study the economy.

NBER executives include:

On Jan. 7, the Business Cycle Dating Committee issued a memo saying the period from a peak to a trough is a recession, and the period from a trough to a peak is an expansion. According to the chronology, the most recent peak occurred in March 2001, ending a record-long expansion that began in 1991. The most recent trough occurred in November 2001, inaugurating an expansion. If we are in a recession or are heading for one, it would be the beginning of another trough. The question is how deep and how long will it be.

The committee watches many things (click here to see a list), but is most interested in:

• Personal income minus transfer payments, in real terms.
• Employment.
• Industrial production.
• The volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

Now, take note of this. The committee usually does not even declare we are in a recession until six to 18 months after the downturn begins. Why? Because estimates change and forecasts get adjusted. The committee wants harder, more reliable data than can flow out monthly. So, the official word that we are in a recession may actually not come until we are heading out of it. That is why some now believe we have already entered a recession.

Howstuffworks.com does an excellent job explaining the ups and downs of our economy:

Working people with higher incomes have more money to spend on other products, which increases demand even more. If demand is high enough, the price of some things goes up. For example, if there are more travelers than there are seats on airplanes, airlines can raise their prices to decrease demand (this could lead to high inflation if it happened across the board, but in the past decade the U.S. economy has shown the ability to grow steadily while keeping inflation under control). In a growing economy, some consumers and producers will not do well, but most will, so the general feeling about the economy is good.

But when supply and demand for products get out of whack, the economy can slow down (take note of this informative graphic). If factories produce more products than people demand, if there are more houses on the market than people want to buy, the economy can start to contract. When that happens, confidence falls. People react to that, too. They stop spending. They slow down investing in the stock market. When the jobless figures hit 5 percent last month, there is reason to believe that people will slow down spending even more, fearing their jobs might be next. The problems grow worse. So two main drivers are supply/demand and confidence.

Until supply and demand level out, consumers won't regain confidence; if this uncertainty lasts for six months, you have a recession.

How do economies get out of a recession?

One popular way of getting out of a recession is to cut taxes. When people keep their income, they have more to spend. Of course, there are other issues that come with that, including governments whining that they don't have enough money.

Government can increase spending and create jobs as Roosevelt did to end the Great Depression. But current politics frown on government jobs and favor private growth instead.

The other major force in recovery is monetary policy. In the coming days, you will hear a lot of talk about whether the Federal Reserve Board will again lower interest rates. The Fed can also increase its holdings in government bonds, which is a way of infusing more money into the government's coffers to spend.

There are already conversations about some sort of economic stimulus legislation this year. The New York Times says:


There are some who say that governments might not have to do much at all in a mild recession. A decline in economic activity, for example, might reduce oil consumption, which could lower prices. Remember, lower prices help ease inflation. As Alan Greenspan says, lower inflation stimulates economic growth.

What is the difference between a recession and a depression?

An economics teacher of mine used to joke that "A recession is when you are out of work. A depression is when I am out of work."

Remember, a recession is a downturn in the GDP that lasts at least six months. A depression is when the GDP drops by more than 10 percent. The last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. There was one segment of time, from August 1929 to March 1933, where real GDP declined by almost 33 percent. By contrast, the worst recession we have seen recently in the U.S. was from November 1973 to March 1975, where real GDP fell by 4.9 percent.