WASHINGTON, May 30, 2014 — Most of the time, we don’t know that we are in a recession until it is over. That’s because by the time the data is available, the recession may have ended. The traditional definition of a recession is two successive quarters with declining output. The new definition is determined by the Bureau of Economic Research. Either way we had a 1 percent decline in output in the first quarter of this year. Does that mean we are in a recession?
The administration says us that the dismal GDP report was due primarily to bad weather conditions. That may be true for January and February, but the month of March did not see severe weather and the overall numbers were still poor. Besides, at least for consumption which represents about 70 percent of GDP, bad weather generally postpones spending but does not necessarily decrease it. In other words, if a consumer intends to purchase a big ticket item, like a new automobile, a snow storm would delay that decision until the weather improved, not cancel the decision.
The Bureau of Economic Analysis (BEA) reports that consumption increased by 1 percent in March which approximately equates to a 12 percent annual increase. That indicates the decisions to postpone consumption in January and February translated to consumers making those purchases in March, meaning the purchases were still made in the first quarter.
So why did GDP drop?
The next largest private sector component of GDP is Business Investment. This represents spending by business to grow and expand operations. In the first quarter of 2014 investment was almost 12 percent lower than it was during the same period in 2013. Not only did this figure cause most of the decline in output during the first quarter, it may mean more problems lie ahead.
Capital investment by business, which leads to growth in production and generally has a positive effect on wage growth, is seen as a predictor of future activity. If business is unwilling to invest, the economy cannot grow. The 12 percent decrease could mean negative future growth.
Also troubling, in April of this year, consumption decreased by 0.1 percent. If this trend continues, the second quarter could be negative and we could now be slipping into recession. After all, if consumers are spending less and business is investing less the economy will contract, although that is not the consensus view of economists. However it is also worth noting that the average post World War II recovery/expansion lasted 58 months. If a recession did begin in January then the current recovery/expansion will have lasted 54 months.
Most economists believe that the economy will grow by about 3 percent for the rest of the year, thereby technically avoiding a recession. If that’s true for the entire year, 2014 growth will average about 2 percent, roughly the same as in 2013. In fact since the recovery began in July 2009, economic growth has averaged just about 2 percent annually. Compare this to the more than 4 percent annual growth that followed the four and a half years after the 1981 recession.
The administration’s economic policies are responsible for this poor showing. We spent over $800 billion on a stimulus package which provided almost no “shovel ready” jobs, but rather lead to a huge increase in the public debt. We passed a health care law that discourages businesses from hiring full-time employees. We raised the tax rates on successful business people so they had less to spend on expanding their business. It is no wonder that investment is falling and job growth so anemic.
At end of July the BEA will release its first estimate of GDP growth for the second quarter. The second estimate, which is more reliable, will not be issued until the end of August. By then we will know if we are currently in a recession. While the majority view says that we won’t be, there is a real fear that current economic policy which is geared to benefit the lowest 15 percent of the income earners may cause a recession for the rest of us.