Recession Procession

Recently, the National Bureau of Economic Research (NBER) made their official pronouncement that the recession that began in Dec. 2007 ended in June 2009. In July 2009, the Federal Reserve had issued its unofficial estimation that the recession had just ended. This latest announcement by the NBER is a statistical confirmation of what the Federal Reserve had announced over a year ago. To many individuals and businesses, however, the recession is not over. In a CNBC interview, the renowned investor and billionaire Warren Buffett stated his more common sense definition that the recession is not over until production and income get back to the levels they were before the recession started. Most would agree.

There is no clear definition of the beginning and end of a recession but the NBER’s Business Cycle Dating Committee states that a recession is “a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.” The rule of thumb is two consecutive quarters of negative GDP growth. But neither the NBER definition or the rule of thumb adequately captures the effect – how it feels – of a downturn in the economy. That is because the rule of thumb is based on quarter to quarter growth or decline in GDP. If GDP were a $1 and, over a year, fell to 80¢, then rose to 85¢ in the following quarter, the economy would still be terrible but the growth in GDP would be an annualized 25%. For this reason, Buffett’s rule of thumb gives a more accurate picture.

Below is a NBER chart of real, or inflation-adjusted GDP, with Dec 2007 being the benchmark of a 100. As you can see, our economy is still below the level of December 2007. (Click to view larger image in a new tab)

The severe downturn in manufacturing and retail sales tells a more complete picture, not only of the national economy, but the state and local economies which depend heavily on sales taxes for their revenue. Total unemployment is about 16% of the workforce and, until that situation improves, there will be only sluggish growth in sales, which in turn will keep on damper on GDP growth.

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