Understanding What Recessions Are

One of the misunderstandings about recessions is what actually happens in the real world. A recession is where economic growth stops, and you are left with flat to contracting sales.

Real_retail_salesNote that economic activity does not grind to a halt — the year-over-year growth rate merely slips into the negative. This is often misstated, in some variation of "Gee, how it can it be a recession — I was out shopping and the stores were pretty crowded." Whenever you see that, the speaker is either technically misunderstanding what a recession is — or alternatively, is painfully long and hoping for the best.

Of course, Growth may falter, not total economic activity. With the $13 trillion US economy, economic
activity certainly won’t fall to zero dollars. Everyone is still
eating, driving to work, using electricity, phones, buying iPods, etc. If economic activity were to fall to an annual run rate of below $13 trillion dollars for a few quarters, well then there’s your mild recession. If it drops much below the $12.75 – 13 trillion dollar range, that’s a bit more serious contraction. Indeed, the greater the year over year contraction in economic activity, the deeper the recession.

Consider Housing:
Sales don’t drop from ~7m homes sold to
zero; rather, the number drops significantly (i.e., 4.5m sold). It only
seems like nothing after ther boom years.

But even if US activity were to drop a huge trillion dollars in a year — thats still a $12 trillion of economic activity, and that typically involves one or two people still going shopping and out to eat occasionally.

So far, we are only at the point where Real Sales have slipped into negative year-over-year territory. High food and energy prices, as well as health care, are keeping nominal sales positive. Outside of that, we see clothing, autos, homes all negative. Consumer Technology spending, and business CapEx spending remain positive.

Indeed, while many aspects of the economy are revealing marked weakness, select areas are still hanging on. We are just as likely to be in a recession — as not — as of February 19th, 2008.

Real GDP Growth, Annualized Year over Year
Q1 1990 – Q3 2007


Source: Economagic


Note:  We were out and about this past 3 day weekend (its not all linkfests); Our anecdotal expeiences are after the jump…   

Anecdotal Shopping Experiences

We were out east this past weekend, checking on the damage done to
the beach house by the past few Nor’easters (yards a mess, house is

Saturday night, we went out for local lobster at one of our favorite joints (Indian Cove) —
during the summer, we always make reservations, but its February, so we
didn’t. It was pretty crowded, and we waited about 10 minutes for a

On Sunday, we hit Tangers (SKT), the big Outlet Mall in Riverhead, to do some, as Missus BP calls it, "Economic Research."

President’s Day sales were everywhere, and the discounts were rather
aggressive. Also note that the Seasonal merchandise changeover was in full effect, as the winter clothes get aggressively marked down.  The parking lot was crowded, but not totally jammed — we
had no problems finding a spot in the middle of the lot. (Around Xmas,
you can circle for days).

I noticed a few things about the Outlet Center:  The "aspirational
luxury" brands — Ralph Lauren, Coach, Lucky Brands, Cole Haan, Kenneth Cole,
etc — all had pretty aggressive sales. Even though this was an outlet
mall, they usually don’t do big discounting.

Spotted quite a few empty stores — more than usual. The Gap and Levi’s had both moved to smaller quarters. New store openings ranged from high end to low, including Oakley (LUX), UnderArmor (UA),  and Coldwater Creek (CWTR).

We did quite a bit of shopping. Pardon all the Retail name dropping, but it will illustrate the degree of discounting that was so prevalent this weekend — especially in stores not known for aggressive price cutting:

– At Coach (COH), Mrs. BP scored a Coach bag and wallet, 20% off; She ended up finding one she liked even better at Kenneth Cole (KCP) at 40% off (back went the Coach stuff);

– At Ralph Lauren (RL), she found a pair of white denim; I got a few polo shirts at 30% off.

– My better half also got two pairs of jeans at Lucky Brand Jeans; The deal was Buy one,
get the next item 50% off (BOGO). Also, I got a very retro West Coast Muscle Car long-sleeve t-shirt at 70% off. Who
pays full price for this crap is beyond me. My Über-shopper
sister-in-law said the jeans were about $120+ each. For all 3 items, we
paid less than $100.

Saks Fifth Avenue (SKS) also had a BOGO 50% off sale. Lots of high end euro designers (bought nothing).

– After 10 years of abuse, my ballistic nylon Timberland (TBL) briefcase has been
showing some wear.  I finally broke down and bought a gorgeous new
leather briefcase at Cole Haan (NKE). I first spied it at Bergdorf’s or
Nordstrom’s (JWN) this past Fall for an absurd price, and didn’t even think
of buying it.  It was listed for half the store price, plus they had a
20% off sale.

Pottery Barn and Williams Sonoma (WSM) had huge sales — everything at least 30% off, all furniture was 60% off. (We bought nothing)

-On Monday, Macy’s (M) opened an hour early for their big President’s Day sale, 30-60% off most items. (It was not crowded at all). I grabbed a pair of Levis
(30% off),  and a very nice Nautica (VFC) turtleneck for 60% off. Saw the same Polos shirts I bought at the outlet center — at Macy’s, it was ~twice the price. The Über shopper had Macy’s
mailed discount cards, so we got an additional $10 off, plus
another 20%. I think they paid us to cart the stuffout of the store.


One of the things I find interesting is what you can — and cannot discern — from anecdotal experiences.

The stores were busy, but not jammed. Discounting was aggressive,
reflecting a combination of weak spending and seasonal changeover.

I do not think I could draw the conclusion that we either are definitely in — or NOT in — a recession. Too regional, too random.

The most I can conclude is that it seemed a little softer than usual at the outlet center for an off-Summer season, holiday weekend sale.   

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Discussions found on the web:
  1. PureGuesswork commented on Feb 19

    This seems to tie in to Joseph Ellis’s thesis in “Ahead of the Curve” that the importance of an actual technical recession is overstated. Most of the financial pain comes as an economy is undergoing the transition from high growth to low growth. By the time we get to actual negative numbers the bulk of the damage has already occurred.

  2. cinefoz commented on Feb 19

    I am a habitual sale shopper. And I am familiar with Tangers discount malls and others. Except for a couple of things I can never find on sale, I always bargain shop. It’s the thrill of the hunt. Why pay retail if I can get 60% off or more just by knowing where to go and when to go there.

    Most of the sales you just mentioned weren’t that good. None would have made me go shopping just to take the discount. 20% – 25% off may be a big deal in your circle, but it is not worth a second glance for most skilled shoppers.

    The stores were probably making a lot from an amateur like you. Not that there’s anything wrong with that. They encouraged you to spend some cash.

  3. kio commented on Feb 19

    May be even more important that quality of life and technological progress still go up even during recessions. For example, more powerful computers for new (soon 3-D) games are getting cheaper and cheaper. So, our kids will not find any recession in that.

    In medicine and pharmacy, new and new drugs are being developed and this sector do not suffer recession at all if to consider enormous rise in prices every year.

    I guess that a good portion of people would prefer recession with a faster technological growth to faster growth in real GDP with a slower tecnological progress. Think, who cares about 12 or 13 trillion if iPhone is available.

  4. OkieLawyer commented on Feb 19

    I concur with cinefoz. The sales you mentioned sound like normal pricing to me. If we are not talking 50% off or more (or something close to it), it’s not much of a sale.

  5. cinefoz commented on Feb 19

    I love the smell of rising futures in the morning. They smell like buckets and boatloads of money. Free for the taking. They smell even better when foreign markets agree, such as today. Buy today before the bargains are gone.

    Talk about genuine bargains. Just look at the stock market. It’s on sale.

  6. JustinTheSkeptic commented on Feb 19

    PureGuesswork, I concur what you said about Joeseph Ellis’s work, “Ahead of The Curve,” but I feel because of the tax-cut anomaly that Bush created, (similar to what Reagan did back in the 80’s), and add to that the substantial fed funds rate cuts of Greenspan, this “recession trough,” has only begun and will be as prolonged and as deep as the Bull Market was over exaggerated to the upside. So I suggest not getting too bullish just yet. jmho

  7. Advsy commented on Feb 19

    Barry’s data is extremely valuable but in order to draw any conclusions we would need to hear from someone in Kansas, Arizona and Illinois or something equivalent.

    Sorry, I was not out shopping this weekend.

  8. Michael Donnelly commented on Feb 19

    Well since we are dipping into the anecdotal here’s mine.

    My sister is a waitress at TGI Friday’s in Warrington, PA. She’s worked there for several years and says since January she has noticed a big difference in the tips. What she used to make in 4 days of tips now takes her 5 days to make.

    I asked if the restaurant was less crowded or if meal tickets were lower. She said the crowds were the same, but tickets may be a little smaller, the more occasional skipped dessert, fewer drink orders. But mostly the tip % was down.

  9. edhopper commented on Feb 19

    Isn’t inflation taken into account? It seems to me that our growth at present is not keeping up with inflation.
    I mean if the economy grows by 2% but inflation is at 4%, isn’t that a real contraction of 2%?

  10. Patrick commented on Feb 19

    With all due respect, I’m not sure someone who still buys turtlenecks is really qualified to discern whether we are in a recession or not.

    Just kidding :)

  11. Jrade commented on Feb 19

    I’ve been through a couple of recessions and we’ve always had a big jump in layoffs and unemployment. I haven’t seen that this time around yet. I would think that we’re due for some real job cuts, especially in the banking/financial world (based on the analysis I read on this site). Maybe next fall?

    With NYC’s economy so reliant on the apparently insolvent finance/banking industry isn’t it possible that it will look a lot more like Detroit in a few years?

    As far as using shopping as an economic indicator – I would argue that the shopping habits of Americans are frequently not rational. A large portion of our society is addicted to buying stuff to feel good about themselves regardless of how they have to scrounge and borrow to do it.

  12. VJ commented on Feb 19


    I’ve been through a couple of recessions and we’ve always had a big jump in layoffs and unemployment. I haven’t seen that this time around yet.

    That’s because you have to have an expanding national workforce FIRST, but we’ve only had negative job growth and a contracting national workforce over the past seven years.

  13. Jrade commented on Feb 19


    Yea, that’s a good point – job growth has been anemic the last 7/8 years. I guess there probably has been a lot of job downsizing when you consider the loss of jobs in the housing sector. (R/E agents, mortgage people, construction) I guess I’m just thinking of the large, corporate layoff announcements that were so prevalent in last couple of recessions.

    I have to say though that I know a couple of job recruiters here in the Midwest that say they aren’t hurting yet. They’re still placing people in accounting and engineering jobs, much to my surprise.

  14. donna commented on Feb 19

    So glad I couldn’t give a damn whose name is on my pants and prefer their isn’t one at all.

    Why people pay those obscene prices for Lucky jeans is just beyond me.

  15. PONCH commented on Feb 19

    I work on the crew of a popular TV show, and I have bought 95% of my clothes at thrift stores and swap meets for the last 10+ years. And I am probably known as one of the cooler dressed people at work, but that’s beside the point. Anyway, I think the same thing when I see people buying any retail clothing…even 50%+ off discounted retail. When you realize you don’t have to pay the prices that idiot Americans pay for things, you never want to / can’t go back. I have trained my younger, recent-college grad girlfriend well. She has a fantastic-looking wardrobe of business attire, and most pieces she paid exactly $1 for. We laugh when we see ads trying to guilt a man into buying diamonds around holidays. There is a better way to live. We save like nobody’s business…we work as little as we feel like, and we are more free than anyone we know.

  16. M1EK commented on Feb 19

    If population growth is 2%, and the GDP grows by 1%, why don’t we call that a recession too?

  17. Pat G. commented on Feb 19

    Nice piece…

    “High food and energy prices, as well as health care, are keeping nominal sales positive.”

    All things we need and absent from the CPI.

  18. PFT commented on Feb 19

    Hedonic adjustments, inflation adjustments based on understated CPI, and the fictitous capital growth bubble meant the real economy outside of Wall Street has probably never got out of the 2001 recession. High military and homeland security spending, tax cuts, fraudulent economic indicators, etc., all kept it a secret.

    Thats why people were borrowing money just to live the same way they were living 15 years ago. In periods of high growth savings should increase, they did not, and debt relative to income should decrease or stay flat, it did not.

    Conclusion. Living standards have been declining for the majority, and their real income has dropped, requiring them to make up the difference by taking on more debt, which can only go on for so long.

    The proof is in why the banks offering sub-primes. The reason is fewer people were qualified to take on prime loans, real incomes were dropping while housing prices were keeping up with “real” inflation. The supply of eligible prime borrowers was shrinking and causing a banking recession. Banks do not make money without making loans. Managers and CEO’s of banks who do not make money get fired. So they made bad loans, held their breath, got some nice bonuses for a few years, and then Greenspan burst the bubble by increasing interest rates, and 1 year later, pop!

    If true, it means getting out of a recession and avoiding a depression will be difficult. Of course, government can just adjust the economic indicators some more, but sooner or later, the people will see the great economy is simply a scrawny wizard hiding behind a curtain and wearing no clothes working feverishly to convince you he is powerful and in command.

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