Editor’s note: Harry Davis, Ph.D., is chief economist for the North Carolina Bankers Association and is a professor of banking at Appalachian State University.
BOONE, N.C. – The U.S. economy is in a recession that probably started in January. The National Bureau of Economic Research (NBER), which is a group of several economists, will look in their rear view mirror and let us know sometime this summer.
There is not a definition of a recession. Most people believe that two consecutive quarters of negative GDP growth is the definition of a recession. Not so. In the 2001 recession the U.S. economy did not have two consecutive quarters of negative GDP growth. The economy suffered three quarters of negative growth but none were consecutive.
The NBER looks at several factors including GDP growth, employment growth, industrial production, sales activity, and personal income growth. Several indicators point to a recession. The index of leading economic indicators has fallen for five straight months. Consumer confidence is at a 16 year low. Housing will not be a positive factor for the economy till 2009. Energy and food prices are taking their toll on consumer spending which is 70 percent of the economy. Household net worth fell $1 trillion in the fourth quarter of last year and at least that amount in the first quarter of this year.
To this point in time, the most important indicator that we are in a recession is data from the employment front. The economy lost 22,000 and 63,000 jobs in January and February, respectively. The January lost was the first drop in jobs in 52 months. In the two previous recessions job loses reached the level of about 250,000 a month. We can expect larger losses for the next several months.
The last two recessions in 1991 and 2001 were short and shallow. Each lasted for only eight months and GDP declined 1.3% and .4%, respectively. The post WWII average decline in GDP is 1.9 percent.
This recession will likely be similar to the previous two recessions in terms of severity. The Federal Reserve (FED) is taking aggressive steps in cutting the federal funds rate along with injecting liquidity in the system to slow the fall and increase economic activity. FED actions are helping to restore confidence to the financial markets. In addition, the $168 billion economic stimulus package will start impacting the economy this summer.
The difference for this recession will be the recovery. Personal debt levels will be higher coming out of this recession than in the past. Household wealth will have suffered more than in previous recessions. The result will be a slower rate of growth in the recovery that begins later this year or in early 2009.
While Florida, California, Ohio, Arizona, Nevada, Michigan are already in a recession, North Carolina is not. Our state will not experience a decrease in Gross State Product in this recession. Housing is not the drag on our state economy as it is in several other states. North Carolina will slow but not experience the downturn facing several other states.