Friday, June 01, 2007

Is a recession in the cards?

Back in February I mused about the possibility of a mild recession this year, based on what I was hearing from economists I know.

It may arrive this summer.

The government cut in half its estimate of economic growth in the first quarter, reporting the slowest rate of expansion since the end of 2002....

Growth advanced just 0.6 percent, compared with an initial estimate of 1.3 percent. The chief reasons for the revisions were adjustments to the estimates of imports and business inventories. Imports, which subtract from the gross domestic product, were stronger than the government first thought. At the same time, businesses cut production and accumulated smaller inventory stockpiles.

If you glance at the accompanying graphic, you'll see that it's a big slowdown compared not just to a year ago but also compared to last quarter. And inflation remains a problem (rising at an annual rate of 2.2%), which limits what the Federal Reserve can do to stimulate the economy.

If the trend continues, the second quarter figures -- due out in July -- could show a contraction. The story notes, however, that most economists think the second quarter will show an improvement, thanks to positive news in consumer spending (up more than expected), the housing market (thus far, less bad news than expected), manufacturing output (expanding) and exports (thanks to a weakening dollar). In addition, employers added 157,000 jobs in May, up from 88,000 in April.

But they don't call economics "the dismal science" for nothing: that good news has clouds. Consumer spending, besides being fueled largely by debt, is expected to slack off, the housing market fallout is expected to deepen, a weaker dollar makes things more costly for consumers, and even at 157,000 the number of new jobs is barely keeping up with population growth. And inflation-adjusted median household income has only recently started to rise (see Page 5 of this Census report (pdf))after falling for five straight years.

So as is often the case with economics, there's plenty of data to support whatever prediction you care to make. The economy is clearly slowing down; the question is how quickly it is doing so and how far it will go. And of course, there's the far-more-fun secondary game of "who's fault is it?"

I don't play that game too much. The economy tends to do what it will with only limited influence by the administration. But it seems safe to say that Bush's economic policy has not been an unqualified success: in exchange for massive tax cuts and soaring deficits, we've endured a recession, an anemic recovery and now a slowdown, with wages lagging far behind productivity and corporate profits. Perhaps we cannot blame Bush for those mediocre results, but we can certainly blame him for the huge deficits incurred to no particularly good effect.

Meanwhile, wait for the July economic numbers and hope for good news.

Update: Changed the post title to better reflect the content.

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6 Comments:

Blogger Yankee Biz said...

This is faulty logic. No one can continue to grow with zero sessions of loss. Even so...growth is growth. Just because the growth is not as strong as it was in the past, you can't fight that we are back tracking or receding.

6/01/2007 3:13 PM  
Blogger Sean Aqui said...

I don't think you read my post carefully.

I did not say we were in a recession, only that one was possible.

And while recessions may be inevitable, they are not desirable -- especially when the interim period of growth is short and marked by lackluster wage and job growth.

6/01/2007 3:29 PM  
Anonymous Anonymous said...

Bush was handed the last recession when he took office. IT was Bush who brought us out of it. One thing that could be done right now to AVOID this slight recession you seem to be holding your breath about is for the Democrat Majority to MAKE BUSH'S TAX CUTS PERMANENT. Just the mere act of doing so, would forestall any such downturn.....as businesses would see that as a positive step in planning their future expansions, etc.

So, let's see if the Dem Majority does the right thing. It's up to them.

JP5

6/01/2007 4:09 PM  
Blogger Sean Aqui said...

False logic, JP5.

I agree that the economy was headed into recession when Bush took office. Whether Bush "brought us out of it" is a matter of much debate. To do so you have to believe that a) presidents have a big impact on the economy and b) the recession wasn't a shallow one to begin with.

But one thing's for sure: seven years of Bush economic policies have produced a modest recovery that didn't trickle down very far, and now another slowdown and possible recession.

Why would you think "more of the same" would fix everything?

There's a certain amount of unprovability here, of course. Bush supporters can always say things would have been even worse without his brilliant economic policies. There's no evidence either way on that one. But they cannot claim resounding success.

6/01/2007 4:15 PM  
Anonymous Anonymous said...

Oh yes we can claim resounding success. It's laughable to deny the economic success and turnaround of the last several years. Bush's tax cuts is what brought about the amount of tax revenues coming into the federal coffers. It's what caused the investment and capital increases to occur.

He also addressed the huge corporate scandals the first year----that hurt at first, but ultimately brought about more confidence. So----we had a recession that was handed to him; tackling the huge corporate scandals; the worst terrorist attack ever 9/11; and the worst natural disaster with Katrina.....and yet, Bush's economic policies brought us through all that successfully. Our stock market is doing great and many parts of the country, including mine, are still in a building boom.

JP5

6/01/2007 4:51 PM  
Blogger Sean Aqui said...

Oh yes we can claim resounding success.

I guess you and I have different definitions for "resounding."

He also addressed the huge corporate scandals the first year.

With deep reluctance. You will recall that he appointed Harvey Pitt to provide less oversight, not more -- even as the various scandals were coming to light. And Pitt, heeding his mandate, did little to address those scandals. His performance in that regard was so transparently bad that he was forced to resign in 2002.

6/02/2007 12:49 PM  

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