Is it a recession or not?

There is a fairly decent article in The Wall Street Journal by Sudeep Reddy entitled "Economists Weigh Possibility of a Recession Amid Economic Growth" which discusses a number of the factors facing economists who are trying to figure out whether the U.S. economy is in recession or not.

One interesting aspect is the divergence of employment and output. Because of productivity gains, we see greater output with fewer workers, which means that GDP can rise even if employment declines. Maybe the real point should be that a recession requires that the decline in economic activity be significant enough to drag down both employment and output.

Another interesting aspect is whether the stimulus checks should be subtracted from personal income since they are really just a "transfer" (for which no work was performed) and NBER looks at real income "minus transfers." The stimulus is technically a "rebate" against taxes, so it is not actually a "transfer" per se. But, for people who have not paid enough in taxes, the stimulus would classify at least partially as a transfer (or "government social benefit payment".) This was not explicitly discussed in the article, but it appears that they used a modified version of the data that had at least some of the stimulus removed, but there is not enough information given in the article to be sure. The government BLS report has this to say:

In the NIPAs [National Income and Product Accounts], rebates for residents of the 50 states and the District of Columbia will be recorded as either an offset to personal current taxes or as a social benefit payment to persons. Rebates for individuals with tax liabilities that exceed the rebate amount will be treated as an offset to personal current taxes in the NIPAs. Rebates for individuals who pay no income taxes (or for whom the rebate would exceed the amount of the income taxes they do pay)will be treated as a government social benefit payment to persons in the NIPAs. 

Ultimately, what really matters is whether the stimulus has a real impact on "getting the economy going again", which will show up months after the stimulus is over. The last rebate payment should have gone out in the middle of July, so we should now be clear of the immediate impacts of the payments and be starting to look at the real economy again. Unfortunately, there will be a number of economic reports over the next two months which still cover the stimulus period. We need to look at the short-cycle data such as weekly unemployment claims, weekly mortgage applications for purchase, and weekly chain-store sales to get an idea how the economy is trending in real-time.

The safe thing to do is to wait a few months and then ignore the numbers for the period when stimulus was occurring (May, June, July.)

Back to real income minus transfers, or what in the BLS report calls "disposable personal income, chained (2000) dollars", the WSJ chart shows real personal income at about $8.5 trillion over the past 9 months or so, but the BLS data is at about the $8.75 trillion level and did not peak in February as the WSJ chart suggests, but had an all-time high in April immediately before we see the huge spike for the stimulus "income" in May. We may in fact see declines for June and July as the actual stimulus payments decline. The June data comes out next Monday, August 4, 2008.

To be clear, real personal income minus transfers has not yet shown any significant decline. There has been nothing on the order of what one would traditionally expect in a "deep" recession such as a lot of people talk about us being in.

The real test is to see if there is a decline in August, September, and October. The pundits and cynics will insist that declines are virtually certain, but I would note simply that to-date, they have been wrong in over-anticipating declines in both GDP and real personal incomes.

I still do not see a true, full-blown recession. I believe that there is a 40% to 70% chance that we could see a recession, but the simple truth is that "we aren't there yet."

Sure, you could argue that if the dollar was stronger and exports were weaker and there was no stimulus that we would certainly be in a recession, and that may be true, but I would argue that for each of those factors to occur, who knows how that would impact all of the other factors that influence the overall economy. Besides, we have to deal with the economy that we have, not some hypothetical economy that "could have happened", but didn't.

Oh, and do not make the mistake of presuming that there will not be any further stimulus if the economy weakens further.

Put simply, be prepared for a rapidly evolving economy and take nothing for granted.

-- Jack Krupansky