Is the US economy in a recession?

photo by photosteve101 via flickr

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.

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  • Kardinall6

    All true what you say here, but to be fair, I’d say the anti-business and anti-productivity climate of the US is very widespread these days even outside the Executive Branch’s policies. I’ve worked in a lot of countries, and the USA really is unique in the layers of red tape and punitive attitude taken toward small business owners and entrepreneurs. Often this extends outside of the pressures on businesses themselves, for example US divorce laws, which are incredibly punitive and damaging toward productive Americans and business starters. US family courts are essentially set up to legally rob Americans who actually work hard and produce– a big part of why the US has nearly the highest divorce rate in the world (it’s a jackpot for divorce lawyers and the courts), plunging marriage and birth rates, and failing businesses that often fall part specifically due to becoming ping pong balls in the family courts.

    In addition, in many states, business starters are hit hard with a sort of “franchise tax” that kicks in before the businesses have even started to post a profit! Business, property and local taxes really add up, in fact in practice, most US small businesses are paying higher taxes than their counterparts not only in Asia and South America, but even compared to Holland, Germany, Scandinavia or even France– while also having to cover costs of college and health care out of pocket! In my experience, only the UK and Canada have higher up-front taxes on new businesses. Also, US expats who work as important entrepreneurs to foster US exports, rather than being helped by the US to assist their efforts, are instead penalized by dumb laws like Fatca that assume they’re criminals, with outrageously punitive tax compliance requirements (minor mistakes leading to thousands of dollars in fines!). Thus business investment in the US is drying up faster and faster.

    The US just isn’t a good place to start a business or be innovative anymore, and to be honest, both parties are responsible for this– both of them scorn the middle class and small and mid-sized businesses. This is a big reason why so many Americans are emigrating overseas, often to developed countries like Holland or Germany, France or Italy or Scandinavia. But also to places like Brazil, Ecuador or Chile in South America, or to Asian places like Korea, China or Japan. A lot of my friends are now working overseas and settling there permanently, and in the next year alone, we’ll likely be seeing much more of this.

    • Blkojo

      Nailed. Que bueno.

  • Anon

    You can’t blame the lack of shovel ready jobs solely at the foot of this administration. I’m no fan of Obama, but the Republican Congress has done everything in its power to be obstructive. Did they sponsor infrastructure spending, which would have created those shovel ready jobs? No, they did not. In fact, their main goal was austerity. Have they stopped the importing of labor to the U.S., which places downward pressure on wages? No, they have not. Their corporate masters want those H1-B Visas for the high end, and plenty of poor illegal immigrant labor to dilute the lower end.

    • Eratosthenes

      I am not a republican but the fact is the dem congress enacted a huge stimulus that should have gone to infrastructure but Harry Reid and Nancy Pelli used it to reward dem donors, supporters, friends, and dem voters.