Over the cliff

Although people have been chattering about a recession for a year now, it was really only in the past few months that a recession really kicked in to the degree needed to indicate a full-blown recession rather that a mere slump or dip. August and early September appeared to mark the point where the economy literally fell off a cliff. This was when Hurricane Ike hit Texas really hard, Boeing suffered a strike, and Detroit cut back on lending for car loans. After the fiscal stimulus in the Spring and early summer, consumers really started to pull back in August and early September, further deterred by the events mentioned above. And then the financial crisis kicked into high gear.

The employment decline in August was steeper than earlier in the year, but still not quite "over the cliff" into true, full-blown recession territory. Now, it does appear that we really are "over the cliff" and could see steeper employment declines, reductions in business spending, further reductions in consumer spending, and further declines in industrial production, at least until Congress institutes enough additional fiscal stimulus to finally boost spending a bit. Weekly unemployment claims now seem solidly up in the 450K range, indicating a recessionary track.

Meantime, it is actually healthy for the economy to contract a bit more to clear the decks of so much deadwood "hangover" from the housing bubble, the Wall Street credit and securitization bubble, and the commodities speculation bubble.

How deep, how broad, and how long are questions that are completely open at this stage of the recession, waiting to see how quickly the banking and financial systems return to something resembling stability. Give Bernanke and Paulson another two months to work their magic and that will be our new baseline. It may be a steep "stair-step" decline from the current level of GDP, but it is what it is, or at least it will be.

-- Jack Krupansky