Richard Whalen

As I warned November 14th, America’s consumer-led economy is slowing down and sliding toward at least a “growth recession” – that’s when the economy’s “normal” growth rate, assumed to be about 2.5 to 3 percent annually, slips below 2 percent (or less) and remains there six months or longer. A straightforward recession is defined as a period of six months or longer when the economy does not grow, but contracts. The last U.S. recession ended in early 1991.

Like so much else in American life, our methodology for measuring the economy’s performance dates back to World War II and the early postwar era. Between 1939 and 1960, every aspect of the nation’s economic, social, political and cultural life was transformed. America went from lingering depression and the surprising, sickening recession of 1937, which cast doubt on every New Deal assumption, to the post-Pearl Harbor massive, flat-out inflationary stimulus of total wartime mobilization. The economy was put under government planning and priorities, producing full employment (and explosive new opportunities for women and minorities) because the war had removed for the duration some four million able bodied men from the civilian labor force into the armed services. In that hectic, heady era was born the macroeconomics of Gross Domestic Product (GDP), a grab-bag of guesstimates and overstatements that sounded much more precise than it ever was.

Enough economic mini-history. In the here and now, John Crudele, the New York Post’s savvy economic columnist, writes (December 4th): “The economy has probably been slowing for 18 months.” Citing recent overstatements, he notes that the federal government’s Bureau of Economic Analysis says GDP grew by an “astounding” 4.9 percent rate in the third quarter, on top of a “very healthy” 3.8 percent expansion in the second quarter. But in the current fourth quarter, despite holiday spending, GDP is slowing dramatically, according to Wall Street’s top economists, falling to perhaps only 1.5 – 1.7 percent, a truly dizzying deceleration from overstatements signaling the advent of a “growth recession.”

We eccentric Americans keep our economic books, using guesstimates of guesstimates to arrive at backward-looking super-guesses of where GDP has been. We will not know whether we’ve slid into a recession until it is well under way. The august National Bureau of Economic Research has to detect the statistical slowdown retrospectively, identifying the trough and then measuring the duration of negative growth quarter-by-quarter. Going into the 2008 national election year, the NBER is not exactly eager to play the Grinch that stole prosperity.

What we see are cumulative data points: one poll shows 40 percent of consumers think we’re in a recession now; another reports 40 percent expect a recession next year. The Wall Street Journal (December 8th) reports: “Evidence Grows That Consumers Are Pulling Back.” The Reuters/University of Michigan and Conference Board surveys indicate that consumer sentiment in early December declined sharply in the Michigan poll to a level lower than any month since 1992 – except for the month following Hurricane Katrina.

Personal and household incomes in recent years have grown modestly. Consumer debts continue their relentless rise. As a result, the defaults and foreclosures that rang alarm bells in subprime mortgages are spreading to other forms of consumer debt, such as auto loans and student loans.

So far, employment, a lagging indicator, is holding up. Unemployment stayed at 4.7 percent in November for the third consecutive month. Average hourly wages rose just 3.8 percent from a year ago, to $17.63. According to the Labor Department’s notoriously inaccurate estimates, non-farm employment rose by 94,000 jobs in November, following revised increases of 170,000 in October and 44,000 in September. Initially, the Labor Department reported gains of 166,000 and 96,000. Private sector jobs increased by only an anemic 64,000 – down by 56 percent from the average monthly gain a year ago. This is not surprising; corporate profits are flat after years of strong growth. In early 2008, economists foresee escalating layoffs. Next year, the unemployment rate is expected to rise to 5 percent or more and by then, we will know whether we are in a recession.