Is the Recession Over ? (Extended Transition Phase)

Today, we are going to get what is likely a positive GDP. There are a number of factors that are contributing to the improving data point, not the least of which are the inventory liquidation, and the faster fall of imports than domestic consumption.

We’ll dissect the numbers later this morn, but a positive GDP raises the following question: Is the Recession actually over?

We know that the Great Recession is over — the panic and expectation that the economic world was coming to an end probably ended sometime in March or April.

But is the “regular recession” over?

We begin looking at the NBER definition:

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” (emphasis added)

That definition raises an interesting question. If we look at the 5 factors NBER considers — GDP, real income, employment, industrial production, and wholesale-retail sales — its somewhat ambiguous  to say unequivocally that the recession is over. We are still losing an inordinate number of jobs (250k+ / mo), industrial production has improved, but is soft, retail sales have been mostly flat, and real income has been negative for a decade.

Perhaps the bimodal definition the NBER uses is outdated: Read literally, their definition suggests that there are only two options, either the economy is expanding or contracting.

It might be worthwhile to consider a third possibility: None of the above. The economy might have reached a state of stasis — a balance where it neither expands nor contracts.

I believe that the NBER was too quick to declare the 2001 recession over. The job loss and lack real income improvement was offset by the economic activity that the ultralow rates caused — in terms of credit driven activity in Retail, Housing, and on Wall Street.

I assume that the NBER believes that normally, the transitional phase of the economy from recession to expansion is quick enough that it needs no specific name or even any definitional recognition.

That might not work so well this time.

Given the current 33.1 hour work week, we might not see a real improvement in employment for years, as firms simply ramp up worker hours towards a fuller 40 hour work week, as opposed to hiring.

Perhaps when the NBER releases their next Memo from the Business Cycle Dating Committee they might consider refining their definition (or at least acknowledging) the current, and somewhat unusual historic anomaly of an Extended Transition Phase.

GDP out at 8:30 am

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Previously:
The Great Recession is Over! Long Live the Ordinary Recession . . . (July 31st, 2009)
http://www.ritholtz.com/blog/2009/07/great-recession-over-long-live-ordinary-recession/