Wednesday, April 02, 2008

Bernanke and the Federal Reserve still not ready to admit that the economy is in recession

If the Federal Reserve believed that the U.S. economy was clearly in recession, Bernanke could have said so in his congressional testimony today, but he did not. The closest he came was to suggest that the GDP could "contract slightly" in the near future (first half of the year), but then recover in the second half of the year. His prepared testimony tells us:

Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.

So, that's the Fed view for now, that GDP "could even contract slightly." The advance estimate for Q1 GDP comes out later this month.

The monthly employment report for March comes out on Friday. If nonfarm payroll employment falls by more than 200,000 then it will be fair to assert that we appear to be in a recession. A smaller decline (say 100,000 to 150,000) would suggest that the economy remains in a gray zone but possibly still short of outright recession. Most likely, we could see a more modest decline or even a modest gain (due to volatility and variability), but that would not necessarily indicate that we are clearly out of the woods. There are simply too many factors in play to expect the economy to act strictly according to historic patterns.

-- Jack Krupansky

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