What is Recession?

What is Recession?  | read this item

The definition of a recession, using the traditional criteria, is an economy that has declined for two consecutive quarters, or six months. A decline is negative economic growth. The Gross Domestic Product (GDP) is the yardstick for determining if there was a decline or not. The GDP consists of all the goods and services produced during the year within the country.

The question arises as to whether the old criteria is satisfactory for deciding whether a recession is here. In the past the GDP was called the Gross National Product (GNP). The difference between them is slight, but this is only the beginning of changes, which throw off the ability to conclude whether a recession exists or not. The GNP will include companies producing the goods and services offshore.

The latest report had the GDP growing at at rate of better than 3%. Ordinarily this would signal that no recession is upon us. But, there was the government program of cash for clunkers, extension of unemployment benefits (which will stimulate an economy) and the government continuing to monetize the debt (printing money). These 3 items alone point out that in the 21st. century, the old criteria cannot be counted upon to tell us if there is a recession or not. The old criteria might be good for the college classroom but not in real life.

Additionally, the unemployment figures are not only manipulated by the government, but here too the criteria varies. The category of unemployment is broken down into sections. When the unemployment rate hit 10.2%, this did not include the U6 part, which includes discouraged workers and part-time workers looking for full- time employment, which if these people are included, the unemployment rate is at 17.5%. These are truly conflicting figures. Financial experts believe that if the unemployment rate exceeds 11%, there will be a new wave of home foreclosures (people without jobs cannot pay mortgages), and the banks will again have financial difficulties. The bad assets are still on the banks’ books, though it looks better for them since the government relaxed the marked to market rule. Marked to market, is simply the price people will pay for an asset now. This makes sense. It is impossible to decide the value of an asset in the future. With this new accounting, the problems of the banks are just papered over.

The stock market is rising from the dead. Is this a sign of the end to our recession? Stocks are rising because there is money being borrowed by the financial institutions at no interest. No interest loans definitely stimulate an economy. The only problem with free money is that it distorts the economy leading to malinvestment (the investing in businesses based on false signs of recovery caused by government monetary policy).

Home prices continue to flatline (prices remaining the same), all this after a precipitous fall in home values. Foreclosures, though slowing, are at all time highs. This rate, in reality is even higher because the financial institutions are keeping homes off the market (shadow inventory) and slowing down the foreclosure process, so as not to make their books look that bad.

Judging by GDP alone the recession has ended. Conflicting with this view will be the real sales figures. Sure, they are going up, but that is because they are being compared to the dreadful figures of the past year. Businesses also are showing some profit because when you let a worker go, the profit for your company goes up. Add in foreclosures, higher unemployment, bank problems on the horizon, the falling dollar, America’s widening trade deficit, government deception in statistics, the recession has not yet ended. Defining a recession is no longer as simple as stating that a decline in the output of goods and services for two consecutive quarters has taken place.

Topics: gnp, government program, gross domestic product, gross national product, home foreclosures, Recession, traditional criteria, unemployment benefits, unemployment rate, What is Recession