February 20, 2002
No Wall Street, the recession is not over.
After GDP was reported as up slightly for the fourth quarter, some analysts began to suggest that the recession was over. Others argued that because two consecutive down quarters did not occur, the recession never occurred.
This week, the committee of the National Bureau of Economic Research that actually dates the beginning and end of recessions was not about the say the recession was over. They even acknowledged that most of the indicators they use to measure such events were continuing to fall.
My own analysis shows an economy stabilizing in November and then rising in December. Indeed, the upward revision in retail sales for December may mean that GDP will be even more than a 0.2 percent gain for the past quarter.
Nevertheless, I also agree that the recession is not over, at least not in January.
For a recession to end, economic activity must be rising sequentially and broadening its strength. Industrial activity remains mired in a downturn. Perhaps auto sales fell in January because incentives were reduced, but it is almost certain that sales by business and consumers fell in January after adjustment for inflation.
By the way, that vanishing inflation during the fourth quarter has resurfaced during January as well. Because of the price increases and the absence of wage gains, incomes also appear to have after Christmas.
We know that employment was off despite a 64,000 gain in jobs in the retail sector. Actually, there was so little hiring for Christmas that the absence of post Christmas layoffs, not a surge in new jobs, accounted for those seasonally adjusted retail job gains.
Indeed, all four major measures of current economic activity--inflation adjusted business sales, industrial production, employment, and inflation adjusted earned income--fell in January.
To be sure, there are hopeful signs of future activity. For the first time in almost a year, more industries reported job gains than job losses. Orders are beginning to grow. However, they still trail shipments. This means that the orders books are continuing to flatten.
Inventory liquidations are at the highest level in history. Although sales also are weak, inventories are plunging even more rapidly than economic activity. Those emptying warehouses will need to be refilled soon.
Also, the energy price bounce that helped to push up prices in January already has disappeared. The fourth quarter drop in prices as measured by the GDP accounts will not be repeated, but inflation is not about to become a financial concern.
The Federal Reserve at Philadelphia already is reporting expansion in its manufacturing sector. Of course, chemicals and pharmaceuticals are more important there than in other parts of the country. In the south, furniture production is beginning to rise after an extremely difficult year.
The stock market is struggling with heightened concerns about the trustworthiness of financial information, but equity prices have been able to rise above levels prior to September 11. The stock signal is not strong, but it suggests that some gains in profits are ahead.
Apparently, the September 11 events created a shock to an economic system that was already in a downtrend following the bursting speculative bubble of the prior year. The shock shoved the economy deeper into recession. As fear subsided, so did the impact of the shock.
We experienced a bounce in November and December. However, the shock did nothing to accelerate the adjustment from the bursting speculative bubble. When the shock and its inevitable bounce back subsided, the downtrend resumed.
Recession remains in force, but it is removing the excesses from the previous expansion. We are near bottom and probably will begin the sustained growth for which the National Bureau is search by March. By then we should see a more concerted rebound in equity values.