JIM LEHRER: Those new signs that a recession is underway, Jeffrey Brown has our economy update.
JEFFREY BROWN: “As the consumer goes, so goes the economy.” That was true in the good times, and now, as the consumer goes not well at all, it is a clear indication that bad times are indeed upon us.
With me to go over today’s numbers is New York Times economics columnist David Leonhardt.
DAVID LEONHARDT, New York Times: Thank you.
JEFFREY BROWN: You wrote today that the longest American shopping spree on record is over.
DAVID LEONHARDT: Yes, it is. I mean, in many ways, today’s report was the end of an era. Dating all the way back to the early ’90s, consumers have increased their spending every single quarter.
They did it through the recession of 2001. They did it even as incomes were not growing very quickly during this recent expansion. And they did it in many ways by taking out more debt, and that debt is behind a lot of this housing crisis.
JEFFREY BROWN: That propped us up — that propped us up over the last few years, is that right?
DAVID LEONHARDT: That’s right. That’s right. In some ways, you can think about it as we were stealing from future consumption over the past decade and now we pay the price for that.
Some forms of debt are great. You can go to college; you can buy a car. But some forms are less good.
And so what we now see is a very sharp pullback by the consumer. As Jim mentioned, it was the biggest decline in consumer spending in almost 30 years. And it’s not clear exactly when that’s going to end.
JEFFREY BROWN: And that helped pull, of course, the whole economy down. And now we have the drop in GDP. What else can you read out of today’s numbers? There were also jobless claims.
DAVID LEONHARDT: That’s right. So far, what this story has really been, it’s been about the financial crisis, dating all the way back to last August, more than a year now.
I think the story is starting to shift a little bit. I think it’s going to shift from the financial crisis — assuming that that crisis doesn’t get worse — to, really, the household sector.
And we’re going to see increasing job cuts, and we’re going to see incomes failing to keep pace with inflation. And that jobs report that you mentioned today is weekly jobless claims. They’re very high. They’re really at a recession level.
Defining a recession
JEFFREY BROWN: People have been talking for weeks, and some for months, about whether we are, in fact, in a recession. Today's news would give more credence to that notion, correct?
DAVID LEONHARDT: Yes, we are in a recession; it's almost certain. I talked to Robert Gordon, a Northwestern University economist, recently, who's on the committee that officially decides.
And he said, "We're clearly in a recession. I think the other committee members will agree with me when we meet. The only question is, really, when did it start? Did it start at the beginning of this year or the middle of this year?"
JEFFREY BROWN: Because they go by this definition, usually, of two bad quarters in a row.
DAVID LEONHARDT: Two bad quarters is actually sort of the layman's definition. The official one is a pronounced, protracted, widespread decline in economic activity.
JEFFREY BROWN: In the eyes of this committee?
DAVID LEONHARDT: In the eyes of this committee. And we all sort of accept its definition. It's used by politicians and in the media. And so, obviously, the big question is not so much when it began for the ordinary person, but when does it end?
JEFFREY BROWN: Now, you get bad news like this today, and yet the markets were up...
DAVID LEONHARDT: Right.
JEFFREY BROWN: ... confusing people yet again.
DAVID LEONHARDT: Right.
JEFFREY BROWN: Why should this be different from other days, I suppose? One reason that was cited was, well, it was bad, but it wasn't as bad as we thought.
DAVID LEONHARDT: Right, it was marginally better than we thought. And I think in some ways the more important thing is that, at a moment like this, people are fearing that there's something they don't know.
And so I think it was actually a bigger deal that it was no worse than people thought than that it was marginally better. It's a relief.
And so people look at this report and they say, "Wow, there isn't some other scary economic thing out there that we didn't know about that we've just learned about," although I think, as the economist as Goldman Sachs said, this report was not as good as the market reaction implied. The economy is really not strong right now, and this report confirmed that.
A federal plan to help homeowners?
JEFFREY BROWN: Well, I wondered -- I mean, another way of thinking about these things sometimes is the GDP numbers look backwards. They're looking back a few months, whereas markets, we're always told, are trying to predict the future.
DAVID LEONHARDT: That's right. And I think there are many people in the markets now who feel like the markets have overshot and that the stock market is very cheap.
I think, when you look at it historically, the market is actually just about average-priced. And so I think people shouldn't have too high expectations about where it goes from here. I think it could go higher, it could go lower, but I don't think actually the market is cheap.
I think what we've seen over the last few days is some sense in the market that maybe the declines have gone too far, too fast.
JEFFREY BROWN: Now, there is continuing talk about a potential government plan to step in to help troubled homeowners.
DAVID LEONHARDT: Yes.
JEFFREY BROWN: We talked about it on the program the other night, about the various proposals that are out there. Any news on where that plan stands?
DAVID LEONHARDT: Well, the government isn't coming forward very quickly with details on the plan. They keep inching a little bit more out and saying, "We'll give you more soon."
It seems to be that the FDIC, the agency that insures bank deposits, is pushing this and that the Treasury and the White House are a little bit more resistant to it.
There's no question that the Treasury and the White House have been behind the curve in responding to this crisis. And so I think, to some extent, they no longer get the benefit of the doubt.
But I also think they're doing something important here. Coming up with a bailout for homeowners is fantastically difficult. It introduces all sorts of potentially dangerous incentives in which people who wouldn't otherwise lose their homes would, in fact, get an incentive to stop paying their mortgage.
JEFFREY BROWN: It's very hard to get it right.
DAVID LEONHARDT: It's very hard to get it right. And so the fact that the administration and the Treasury are pushing to make sure the details of this are going to be OK, I actually think is quite important.
Bailout money used for dividends
JEFFREY BROWN: One last thing. And also, Jim mentioned it in our news summary, is this question of banks that took money, have taken money in the rescue plan, and the reports are that they're not using it for loans. In fact, they're giving it out in dividends to shareholders.
How much of a stir do you feel that is causing, even political resentment out there, over the way this is developing?
DAVID LEONHARDT: I think it's going to depend on a great degree on where this goes from here.
The credit crisis has actually eased just a little bit in the last couple weeks. If that keeps happening, I think people aren't going to be worried so much about whether this dollar went to dividends or went to new loans.
But if it doesn't ease, then it's really going to look, once again, like the latest plan that the Treasury has come up with isn't quite the right plan, and it's going to have to shift again.
Now, even if that's the case, the good news is, five days from now, we're going to have a new administration coming in. And we're going to have a whole injection of fresh blood, whether it's a McCain administration or an Obama administration, and the story is going to start to change pretty quickly.
JEFFREY BROWN: One way or another, this is falling to whoever's next, right?
DAVID LEONHARDT: Yes, it is.
JEFFREY BROWN: All right, David Leonhardt of the New York Times, thanks very much.
DAVID LEONHARDT: Thanks for having me.