A Different Kind of Recession

The official arbiter of US business cycles, the National Bureau of Economic Research, has made it official: the US economy is in recession. However, contrary to our belief that the US avoided recession until the third quarter of 2008 (MP: a belief I share), the business cycle dating committee of the NBER (a group of academic economists) decided the expansion that began in November 2001 came to an end in December 2007.

Even with rising inflation, and falling home construction, real GDP contracted at only a tiny 0.2% annual rate in the fourth quarter of 2007, and grew in the first two quarters of 2008, including a quite healthy 2.8% growth rate in Q2. Not since 1970 has the NBER called a recession for a period including such a strong quarter of real GDP growth (and remember that the 1970 data has been revised substantially in the intervening years).

In our view, despite the dating of the start of the recession to December 2007, the current recession would not have been a recession at all without the “risk aversion hysteria” that struck the financial system and broader economy in September 2008.

As a result of this being a different kind of recession, we believe that rather than being a lagging signal of economic growth, consumers will lead the way out of recession, ramping up buying well before businesses – made skittish by recent events – reassert a normal level of risk-taking.

The rebound in consumer spending so evident in this holiday shopping season, an apparent stabilization in initial unemployment claims, a huge drop in gasoline prices, a strong rebound in mortgage applications, and the placement of new corporate bond issues, suggest that risk aversion is abating.

~Brian Wesbury and Robert Stein, First Trust Portfolios

MP: The announcement of the recession that started in March 2001 came in November 2001 (the month the recession ended), and the announcement for the recession that started in July 1990 came in April 1991, a month after the recession ended. Given the NBER's announcement track record, the December 2007 recession might actually be close to ending.