The recession is coming. Or is it? As a matter of fact, what is it? Enter the world of economic predictions that lies somewhere between crystal balls and slide rules. Something is happening to our economy; that, most can agree on. But exactly what is happening, fewer seem to agree on. Recent news of layoffs and lagging consumer confidence have some sounding the recession alarm. Others have yet to make the call. Why the disparity? Because not everyone agrees on what a recession is and how we can predict one.
Let's start with the word. Recession. Dictionaries and common wisdom agree that it is a period of declining economic activity where factors like the gross domestic product and employment are down for at least two quarters, and maybe for up to a year. Alan Greenspan, on the other hand, thinks that is a bit of a crude definition. To him, the key issue is whether or not a decline impacts consumer confidence. So it's not just whether or not indicators are down, it's whether or not you and I think it's all doom and gloom for the next little while. Some people take it even further. Take, for example, the National Bureau of Economic Research, Inc., a non-profit group that aims to promote a better understanding of how the economy works, and whose mission, apparently, includes identifying the arrival of a recession. According to their Web site, "The NBER does not define a recession in terms of two consecutive quarters of decline in real GNP. Rather, a recession is a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy." Confused yet? Well, predicting a recession is no easier.
Ask anyone if we are about to have a recession and there is not much consensus. Let's look at what has happened over the past few months. Unemployment figures have risen, jobless claims have risen, capital spending by companies has dropped, and layoffs have been announced. Meanwhile, company inventories, a closely watched factor, are mixed. Inventories increased in the last quarter of 2000, but less than in the third, suggesting that a slowing economy did not produce a backlog of goods. On the flip side, consumer spending continued to increase, as did government spending. New home sales rose by over 13 percent in December, and while company spending in most areas declined, investment in new buildings was up. That's just the tip of the iceberg as far as economic indicators go, and it's easy to see that it's still a mixed bag, prompting many analysts to be cautious with their announcements.
So, who's saying what? Given that Alan Greenspan just cut the interest rate twice in a row, its safe to assume that he is at least trying to fend off a recession by stimulating the economy. And, don't forget, the ever-important indicator, consumer confidence, is down. Stephen S. Roach, chief economist and director of global economic analysis at Morgan Stanley Dean Witter, says they've already decided to call a recession. The NBER is still more skeptical; according to senior fellow and economic counselor Victor Zarnowitz, manufacturing sales and real personal income are up, so all of the pieces are not yet in place. In fact, the NBER did not officially declare the last recession until a year after the fact. Whether or not we are in a recession depends upon who you listen to.
Needless to say, this is not an exact science. Furthermore, we can't forget that the economy is run by sometimes rational, and sometimes irrational, human beings who may make decisions based on analysis or instinct, gut reactions, and rumors. Economists have yet to invent a machine or algorithm to accurately gauge what consumers will do. Even the Consumer Confidence Index is based on only 5 survey questions that ask consumers how they feel about conditions now and in the next six months. Whether or not they answer based on what they feel or what they see in the news is anybody's guess. This is not to say that the CCI has not been a reasonably accurate indicator in the past and that analysts should ignore it. In fact, most of this guessing game is based on looking at previous trends and seeing if the current climate parallels anything that led us into a recession before. The problem right now is that the indicators are still mixed, times have changed, and not everything matches the past. In a recent NEW YORK TIMES article, Robert J. Shiller, a professor of economics at Yale University, writes that today "we are out of the range of historical experience." Put simply, the economy has never been like this before, and we don't have too much to go on. So we may be in for a surprise.
To return to common wisdom, what goes up must come down. Our economy has been performing very well for the past few years. At some point it has to slow down. Whether or not that means recession, depression, panic, or just relaxing for a bit is hard to predict. The key for consumers is to be educated and be prepared. Be wary of listening to only one source for predicting the future, and -- as always -- keep something saved for a rainy day.