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Inside Views

Economists Debate; Consumers Consume – or Don’t

So what is a recession? And why is it important to know? If you read this month’s lead story, there seems to be some debate on whether or not we are in a recession.

Think of the economy as if it were a car. When the car goes forward the economy is growing. Then, it comes to a hill. Since it’s a big hill, the car starts to slow down and strain a bit. In economic terms, this is a slowdown, and in normal times the car will make it up the hill without much of a problem.

If the car cannot make it up the hill, and it dies and starts to roll backward, that’s when we have a recession. In a car this may happen because it runs out of gas, or because something broke as it hit the last pothole, or maybe it just overheated from being run so hard that the engine seized up.

The classic definition of a recession is two consecutive quarters of negative real economic growth, or the car rolling back down the hill. The National Bureau of Economic Research (NBER) is the private, non-partisan group that officially declares if the economy is in recession.  They make their determination using monthly data and additional indicators like employment, personal income and industrial production, as well as gross domestic product.

As of today, the NBER has not declared that the economy is in recession. The last two quarters of data from 2007 indicate that the economy was growing robustly in the 3^rd quarter, but slowed dramatically in the 4^th, indicating a slowdown, not a recession. 

Since the 1^st quarter of 2008 just ended and 1^st quarter data is not yet in, it cannot yet be determined whether we are still growing or starting to slide back. Thus, no matter what you read in newspapers, as we have all been doing for the last six months, a slowdown is not a recession.

So why is all this esoteric economic mumbo-jumbo important? Getting our definitions right is important because it is not the bursting of the real estate bubble, or the fall in the stock market, or the decline in the value of the dollar that is important in determining the vitality of the economy. Rather, the most critical ingredient is our own personal expectations.

What we think will happen determines what we do, and what we do in turn determines what will happen. Our expectations thus become self-fulfilling. And the more people believe something, the more likely it is to happen. 

Take me for instance. I really want to have garage door openers installed at my house. After all these years I am getting really tired of getting in and out of my car to open the garage door that is way too heavy because Home Depot doesn’t carry large enough springs for the door. But the job is not simple because I have a low ceiling. The proposals I have are actually pretty darn expensive. 

Since I keep hearing the economy is not in good shape and I don’t know what kind of financial year I am going to have, I will be putting off the job. The guy that was going to do the work had plans for the money he would earn. Now he can’t do whatever it was he was going to do. And the same thing holds true all the way down the line. My expectations have become many people’s reality.

 During March, all of the several indexes of consumer confidence fell to new lows. With all of the bad news out there for such a long period, it is no wonder we don’t feel very confident. And this lack of confidence will surely make us undertake actions that will make things even worse. 

Personally, I think things are going to start getting better. The housing market, at least in this area, seems to be bottoming out, and more people are out looking for deals. Exports are surging because of the weak dollar, creating lots of jobs. And spring has just started, and the renewal of nature can’t help but raise our expectations.

James Coyle
President