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Posts tagged ‘economy’

Guest Blog: Jared Bernstein – Recession Obsession

The following guest blog was written by Jared Bernstein, a member of the Workforce Institute Board of Advisors. 

Economists, including myself, are obsessed right now with the question of whether or not the economy is in recession.  It’s obviously an important question, but for many in the business community, it is, shall we say, a bit academic.   The bottom line for most businesses is…well, it’s the bottom line.  So at a time like this, with the economy definitely slowing- possibly, I’d say likely, to the point of actual recession – a better question is what impact might that have on the type of robust economic activity upon which businesses depend. 

Let’s start with a look at the lay of the economic land, which isn’t too pretty right now.   A speculative bubble in the many housing markets across the country burst last year, and the spillovers have been far-reaching.  The direct impacts have been foreclosures, mostly in the sub-prime end of the market, and, much more broadly, falling home prices. But the damage to the economy goes much deeper.  The housing bubble was inflated by all kinds of creative and innovative-those are the nice words for them-lending schemes. 

The loan-rating agencies and bank regulators, including the Federal Reserve, were asleep at the switch, and lots of these shaky loans worked their way into the financial system, both here and abroad.  This led to a freeze in credit markets, and this economy thrives on free-flowing credit.  The Federal Reserve can cut rates and pump liquidity (cash) into the system, but if investors are sitting on the sidelines, waiting for this mess to get sorted out, it won’t help much. Also, as home prices fall, homeowners are much less prone to refinance their mortgages and pump some of that new found cash into the economy. 

Absent housing stimulus, we count on the job market to provide consumers with the income they need to keep the economy moving forward-consumption is 70 percent of GDP.  But the job machine appears to be heading for a stall, as well.  Last year, unemployment rose from 4.4 percent to 5 percent.  Yes, that’s still a low rate, but every time unemployment has gone up that much, we’ve either been headed for a recession or in one.Let’s get technical for a brief minute.  A recession is officially called by a group of econ profs called the Business Cycle Dating Committee, which sounds a little like a lonely hearts club for wonks.  Their definition of 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.”  

I can tell you the following facts right now: real income is down the past couple of months, private sector employment fell (slightly) last month, industrial production is down (again, slightly) since the summer, and retail sales, strong in November, appears to have stumbled in December.  But if the officials ultimately make the recession call, they won’t do so for at least six months from now.  So the rest of us, especially those in the business community who’d like to get a sense of what’s coming are left to figure this out for ourselves.  My take is that the pressures on consumers are too high to keep the economy out of a slump.  I can’t be sure until we see if the job market is really heading for the tank.  The December report was unequivocally weak, but one bad month does not a trend make. 

Still, it has been slowing for the past year.  Fed rate cuts will help a little, but with banks and investors still discovering new infections in their portfolios, they’ll remain spooked for awhile yet.  If you read your papers, you’ll see that Washington, where I ply my trade, is talking about the possible need for a fiscal stimulus.  I give the basic thinking behind that idea here in the TPM Cafe ; it’s the notion that when the private sector cycle is down for the count, the public sector needs to kick in to prime the pump. Given the problems documented above, this is clearly a case for a measured stimulus package that’s timely, aptly targeted, and temporary.  The worry is that politics will queer the deal.  Already, some folks are talking about large, permanent tax cuts that have everything to do with their agenda and nothing to do with a quick, temporary jump start, such as the one suggested by my organization, the Economic Policy Institute.  Anyway, whether the recession daters tell us six months from now what most us already think we know is beside the point.  The business environment, especially for firms that depend on robust consumer demand, appears to be in trouble.  It’s happened before, and if we play our cards right, we could offset some of the damage.  But, as much as I hate to go all dismal on you, the facts are pointing towards an economic slowdown.

Are you seeing signs of slowing growth in your business?  How does that affect your workforce planning?