Not Saying Recession Doesn't Make it So

Posted: Aug 21, 2011 12:01 AM

That’s it, I’ve had enough. 

To quote the infamous Howard Beale of Network fame “I’m mad as hell and I’m not going to take it anymore.”  Do the media, politicians, market analysts, and the general public always have to drink the Kool-Aid? 

Can’t any of them think, or is it just the expedient way to embrace popular thought?  In the 1970s, I and other colleagues viewed the new core inflation definition as a joke, a way to hoodwink the public from seeing what real inflation was doing to their paychecks. 

There was absolutely no way, I thought, that any intelligent person would disregard two of the most significant factors about inflation: food and energy. 

This won’t last, we said, the American public is not that gullible.  But alas, even the Federal Reserve operates using core inflation, and yet, everyone still drinks the Kool-Aid. 

Are you kidding me?

We now have a similar conundrum regarding the definition of a recession.  Let me cite Wikipedia: “In economics, a recession is a business cycle contraction, a general slowdown in economic activity. 

During recessions, many macro economic indicators vary in a similar way. 

Production as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall during recessions, while bankruptcies and the unemployment rate rise.” 

 Unfortunately, this understanding of a recession somehow got shoved to the back burner and was replaced by a different idea, namely two consecutive quarters of negative GDP. 

Rather than a comprehensive evaluation of the overall economy, the belief was that a hard number could be more easily measured.  Theoretically, that’s not a bad idea. 

However, practically speaking, it makes it very easy for the data to be manipulated, with monthly revisions commonplace. 

That’s why the National Bureau of Economic Research (which determines recessions) uses the historical definition, not the expedient two negative quarters. 

I’ve been listening to the economists and strategists from all the buy-side houses, mutual funds, and even the White House, extolling a marginal chance of having a double-dip recession. 

If, however, you examine the actual definition, no honest analyst would be asking the question of revisiting a recession; rather, they would be asking if we ever got out of a recession in the first place.

More importantly, they should be asking about the chances of another Great Depression. 

It’s not some random number that tells people whether or not it’s a recession, it’s the tremendous financial and economic pain they feel every single day.


John Ransom | Create Your Badge

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