Editor's Note: Anirvan Banerji's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published April 2 on RealMoney.
The second-guessing has already begun, with many who didn't predict the recession claiming the rise in fourth-quarter gross domestic product shows there really was no recession, so it was a mistake to have officially recognized it. Others have said that this recession was the shortest and mildest on record. Really?
The best way to decide this issue isn't to rely on the sort of superficial analysis that's so far been trotted out to justify such assertions, but to examine in depth whether this recession was as pronounced, pervasive and persistent as past recessions. And here we should rely not on a simplistic rule of thumb like "two down quarters of GDP" -- which is neither a necessary nor a sufficient condition for a recession -- but on the official U.S. definition of a recession.
By that definition, a recession is essentially a pronounced, pervasive and persistent decline in output, employment, income and sales. Historically, all recessions have been marked by concerted declines in output, jobs and sales, and some (but not all) have also seen income fall. To judge whether this really was a recession, then, we need to see how the latest declines in those indicators compare with past recessions.
About 18 months ago, I first
wrote of the recession danger. A year ago, when, as we now know, the recession began,
I warned that a recession was no longer avoidable.
So I realize that some may not consider me quite impartial on the subject. But if we just stick to the facts, you can objectively judge for yourself whether this was really a nonrecession, as some would have it -- or an honest-to-goodness, classical business-cycle recession.
Why look back? Because those who once proclaimed there would be no more recessions -- the loudest cheerleaders for the "new era" -- are the ones questioning whether there was a recession. And if they can revive the delusion of a new era of endless growth, the stage would be set for another round of booming excesses doomed to end in a bust.
Depth, Duration and Diffusion
A couple of months ago,
I wrote that a recovery was at hand. I now believe the recovery began about then, around December or January. While data revisions might change the details, they won't change the broad contours of the recession. So we can already compare this recession with its predecessors in terms of output, jobs, sales and income.
The key measures of output are GDP and industrial production. The key measures of jobs are nonfarm payroll employment and the jobless rate. We should also look at real personal income and real manufacturing and trade sales -- the broadest measure of sales in this economy.
We can measure how pronounced and persistent the recessionary declines were for each of these six indicators. But gauging the pervasiveness of recessionary declines is harder. The best measure is the Employment Diffusion Index, which is the percentage of 353 industries surveyed by the Labor Department where employment has gone up.
Some have suggested that the recession shouldn't have been recognized so fast, because later data showed it to be less severe. So in each of the charts that follow, the light portion of the last bar shows what the numbers said in late November when the recession was officially recognized, and the dark portion of the last bar shows any further worsening revealed by the latest data. If there's no change since November, the entire bar is light in color.
Now let's look at the charts. As the chart on the left below shows, of the seven recessions since 1960-61, the latest is the shallowest in terms of GDP, although the 1969-70 recession wasn't much deeper. As the chart on the right below shows, as measured in months, the duration of GDP decline is also the shortest at one quarter, but that's the same as in the 1980 recession -- before a 1995 data revision changed it to a two-quarter decline.
The chart below on the left shows the drop in industrial production this time to be the fourth largest of the seven recessions, i.e., right in the middle. But in terms of duration, this decline is clearly the longest, as shown by the chart on the right, measured in months.
Turning to nonfarm payroll jobs, this decline is the smallest of the seven, but is close to the 1969-70 and 1980 recessions, as shown by the chart below on the left. The decline in jobs exceeds the 1969-70, 1973-75 and 1980 recessions in duration, matches the 1960-61 recession, and is surpassed only by the last two recessions in 1990-91 and 1981-82, as the chart below on the right shows, measured in months.
This rise in the jobless rate is also the smallest of the seven, but not by much. In fact, it's close to the increases in 1969-70, 1980 and 1990-91, as shown in the chart below on the left. This time, joblessness rose just as long as it did in 1980, and nearly as long as in 1960-61, as shown in the chart below on the right, measured in months.
The drop in sales is also the smallest, but it's close to the percentage declines in 1969-70 and 1990-91, as shown in the chart below on the left. The downswing in sales this time lasted much longer than in 1990-91, a bit longer than in 1960-61, and the same as in 1969-70, as shown in the chart below on the right, measured in months. Only in 1981-82 did sales decline much longer.
This time, there was no cyclical decline in real personal income, but that was also the case in both the 1960-61 and 1969-70 recessions as the charts below show. This is consistent with a recession that was relatively mild for the consumer sector, thanks in part to aggressive Fed easing.
Finally, as shown in this last chart, the latest recession showed about as widespread a loss of jobs as the last three recessions in 1980, 1981-82 and 1990-91, based on the recessionary low point in the percentage of industries showing employment gains, as measured by the Employment Diffusion Index. Job losses used to be much more widespread in earlier recessions, when the service sector was less dominant.
Decline in Employment: How Pervasive?
Thus, a detailed examination of this recession in terms of its depth, duration and diffusion shows that its severity was very much in line with past recessions, although on many counts it was milder than most. Clearly, this was not the shallowest and shortest recession ever. It was one of the milder recessions on record in some ways, and one of the longer downturns in other senses.
The charts also prove that the data didn't show a very different picture in November, and thus justified the recognition of this recession -- except to those who wrongly believe that two down quarters of GDP technically define a recession.
So then, why did GDP rise in the fourth quarter?
GDP rose in the fourth quarter instead of falling as most had expected, leading some to claim there would've been no recession without the Sept. 11 tragedy -- never mind that the recession began six months earlier, or the scandalous implication that the terrorists had the power to bring the U.S. economy to its knees, which is what they'd love to believe. What's seldom noted is that, paradoxically, what followed Sept. 11 actually boosted fourth-quarter GDP.
We know that business led the way into recession in the second half of 2000. But few remember that pre-9/11 September 2001 surveys showed consumer expectations plummeting to their worst levels in almost a decade. These expectations are good leading economic indicators, and their plunge was a clear sign that the recession was about to worsen.
However, after the brief paralysis that followed Sept. 11, economic activity revived, and fourth-quarter GDP actually rose. That's because, after the attack, the
slashed rates the way it would never have otherwise. This let U.S. automakers offer 0% financing, which caused car sales to soar enough to single-handedly account for much more than the entire rise in fourth-quarter GDP. Separately, the boost in government spending due to the war on terror was by itself larger than the entire rise in fourth-quarter GDP. Thus, without these completely justifiable emergency measures, fourth-quarter GDP would very likely have dropped.
Lower interest rates also helped housing and other sales, while the resultant surge in refinancing put money in consumers' pockets. Also, the collapse in air travel lowered energy prices, thus acting like a tax cut for consumers.
What nobody knew after Sept. 11 is whether the terrorists could strike again. Luckily, they failed, and the cumulation of nonevents on the home front, along with the huge stimulus justified by the circumstances, revived confidence and spending. While this speaks to the fundamental resilience of the U.S. economy, it doesn't suggest that there would have been no recession without the events of Sept. 11. On the contrary, without the massive reaction to the attacks, fourth-quarter GDP growth would probably have been negative.
The Perils of Complacency
Bottom line, in the absence of further terror attacks, the post-Sept. 11 emergency stimulus gave the economy a huge boost it would never have received otherwise. Even so, this recession was not much different from its predecessors in terms of severity, thus it would be a critical error to succumb to the delusion that recessions can't occur anymore in the U.S. economy without major shocks.
The reason such a belief is so dangerous is that most major bear markets are associated with recessions or the fear of one. If we start believing once again that the new economy is alive and well and that recessions are no longer possible, we'd also believe major bear markets are improbable. If so, it would be rational to buy on dips, because those dips would have to be minor and short-lived. Of course, that's the kind of thinking that helped create the late 1990s bubble in stock prices.
The objective evidence is clear. This was no less than a classic business-cycle recession. What's more, business cycles remain, as they always have been, part and parcel of free-market economies. As investors should know by now, denial of this basic reality is dangerous to their financial health.
Anirvan Banerji is the director of research for the
Economic Cycle Research Institute , which was founded by Dr. Geoffrey H. Moore, creator of the original index of leading economic indicators (LEI) for the U.S. Department of Commerce. Banerji is on the economic advisory panel for New York City, and is also a member of the OECD Expert Group on Leading Indicators. At time of publication, neither Banerji nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Banerji cannot provide investment advice or recommendations, he welcomes your feedback at