Recovery Or Not?

Some of you have expressed confusion at the news that the official folks who decide when a recession ends have not yet pronounced the beginning of the recovery. On the contrary they continue to mutter darkly that it’s too early to make the call.

This is because there still is no concrete definition of what a recession is, despite the often quoted notion that it is two consecutive quarters of a decline in GDP.

That’s only part of the picture that they look at. They also take into account the employment picture, and, as we know, unemployment remains stuck at very high levels.

So the apparent inconsistency is really simply a technical one. The economy is growing. We have not seen negative GDP for over six months, and all the signs are that the current quarter is even stronger, which would make it nine months of growth. Yet the official call of the end of the recession is waiting for a better idea of the jobs market.

My feeling is that last month’s slight uptick in payrolls – 162,000 additional jobs – will turn out to be sufficient for the recession to be called over.

Meanwhile we can ignore the discussion, since it is really of more interest to historians and analysts than any of us.

I have always said: if the economy feels bad, then it is bad, no matter what the official scorekeepers say.

The more interesting discussion is not about the timing of the recovery, but its strength and its sustainability.

On those two fronts nothing much has changed. The economy is now well into a growth phase, but there are still very significant risks that could cause it to stall again. Most analysts are looking for growth of between 2.5% and 3.0% this year, which is below the US long term trend, and is quite weak for the start of a recovery. My own feeling is that we are more likely to be at the low end of that range because of the repercussions from the banking crisis. In particular, as growth picks up, I have concerns as to whether enough credit will be available from the banks. With the looming write offs related to commercial real estate likely to hamper bank capital building, and with new regulatory rules relating to both liquidity and capital on the horizon, I think it will be another year at least before the banks will ramp up lending enough to support GDP growth at the historic average.

Even this argument may be irrelevant. The bigger worry is that in the next few quarters credit demand will linger at low levels anyway. The enormous slack in the economy suggests that businesses will have little need to invest – hence they will have little need for bank loans. And on the consumption side, the ongoing balance sheet reconstruction by households suggests that consumers will continue to pay down debt rather than borrow at the pace of recent years.

Both these trends imply that the lack of credit may not be as much of an issue as I originally thought it might. But that doesn’t mean GDP will grow at historic rates. On the contrary. If businesses are not investing and consumers are not borrowing but are saving, the implication is that growth rates will be depressed well below those historic averages.

If we then layer in a weak credit supply as well, the outlook has to be one of very modest growth well below the kind of growth rates being hyped on Wall Street.

So we should not be distracted by technical discussions about whether the recession is ‘officially’ over. Who cares? The big questions all relate to how we get growth to be strong enough to whittle down unemployment.

Right now it looks as if it will be a long wait.