Last week's announcement that the recession was over in June 2009 didn't surprise many economists, but many consumers were scratching their heads, as we discuss in this video.
The good news is that after such declarations, the economy almost always continues to expand for a considerable period of time based on 11 post-World War II recoveries. In other news, the markets were pleased that major real estate indicators have stabilised, albeit at low levels, after the initial tumble related to the expiration of the housing credit at the end of April.
Manufacturing news last week was decidedly mixed as the European Purchasing Managers report showed a larger-than-expected decline, while the US Census Department's new durable goods order report, excluding transportation, was surprisingly robust. My personal opinion is that the market has become too fixated on manufacturing data, which at this stage of the recovery is more volatile and less conclusive than earlier in a recovery. It appears some analysts are confusing slowing manufacturing growth rates with outright declines, which isn't helping matters, either.
Initial unemployment claims moved the wrong way again last week after two weeks of holiday-induced positive news.
Last week's Reports Reinforce My Third-Quarter US GDP Forecast of 2.0%-2.5%
My overall thesis on the economy has been that an improved net export number combined with a decent business investment number would provide the fuel for an improved third-quarter GDP number (2%-2.5% versus 1.6% for the second quarter) as the consumer continues to chug along at a pretty sluggish pace of 2% or so. Last week's durable goods report reinforces the private-investment portion of that thesis. Construction spending and real estate brokerage commissions are likely to be the two big factors that will weigh negatively on the GDP report.
National Bureau of Economic Analysis Declares an End to the Recession of 2007
While many of us suspected that the economy left the recession in June 2009, it's now official. The National Bureau of Economic Research, the official arbiter of recessions (and not a governmental body, for the cynics noting the approaching elections), officially declared the recession over as of June 2009. The recession lasted 18 months, beating the previous record of 16 months for the recessions of 1973 and 1981.
From peak to trough the economy fell 4.1% (so far we have recovered about 3% of that) in terms of real GDP, which is the largest post-war decline ever recorded. As I point out in last week's video, the official declaration of the end of the recession just means that things aren't getting worse--it doesn't address the pace of improvement or even whether we've gotten back to where we started.
As slow as the recovery has been, things could be worse. Even though the 2001 recession was officially over in late 2001, it wasn't until almost two years later that employment stopped going down. This time around, employment started moving about six months after the recession was over.
The Official Declaration Means Reduced Risk of a Double Dip
Although the declaration isn't particularly useful, as investors surmised the recession was coming to a close over a year ago, it does have a practical application. The NBER is extremely cautious in declaring an end to a recession. For starters, they use several major data points, not just GDP growth, as many people assume. They also wait for the major data revisions (the last of them is personal income and consumption data revised each July) so that a major revision doesn't end up forcing the arbiters to reverse their decision.
Because of the NBER's cautious approach, real GDP growth has never gone negative immediately after a recession's end date. The shortest of the postwar recoveries was 12 months (the closest to a double dip, with the recovery lasting just July 1980 to July 1981). The average of the 11 post-World War II recoveries was 58 months (median 45 months and second-shortest 24 months). Economies put in positive motion tend to stay in motion due to the virtuous cycle of improving consumer incomes, more spending, more production, leading to more income, and so on.
The Financial Crisis May Hold Back the Recovery, but Less than Some Fear
As many readers have pointed out, the financial component of this recession is likely to hold back economic recovery some. Professors Kenneth Rogoff and Carmen Reinhart produced a paper showing that the combination of a normal cyclical recession with a financial calamity produces much slower and much smaller economic recoveries.
I think the headwind may be a little less than this study indicates in the case of the US Sustained powerful actions by the Federal Reserve and certain other governmental bodies may have stopped some of the worst effects. Furthermore, the sheer size of the US economy and its reserve currency status probably will lessen some of the normal pain inflicted by financial collapses. Investors can clearly opt out of the debt of Spain, Finland, Norway, and so on, all cited in the report, but they can't, as a practical matter, dump all of their US debt holdings, at least in the short run.
