Yes, we are in a recession, according to the National Bureau of Economic Research. And yes, serious intimations that this recession will be deeper and more severe than previous ones are already apparent. And just in case you were wondering, the current recession is already longer than the last two.
Furthermore, the government’s policy attempt to rectify the current crisis is in limbo as we transition from the Bush to the Obama Administration. Given how policy makers (the Treasury and Fed in particular) have already bungled things with their inconsistent ad hoc approach, perhaps as a result of making a bad situation worse, there are those that perceive this temporary policy paralysis as a blessing in disguise.
Therefore, I thought we’d start the term with a review of how we got to, and where we currently are, in terms of the economic situation, for those who have been following this horror-show or for those who have just crawled out from beneath a rock.
But before we begin, I advise all formerly under-a-rock dwellers to reconsider their recent migration. After all “ignorance is bliss.”
I suppose we should begin with the bursting of the housing bubble, because that is what kicked things into a downward motion.
Our current crisis, which has its roots in the subprime mortgage market, resulted in a credit markets deep-freeze, eventually pushing the economy down. Just as a reminder, the subprime meltdown, while sizable, was enough to bring down the economy and was viewed by many as manageable.
Its potential adverse effects to the overall economy were underestimated, because there were few who understood the complexity and breadth of the 21st century financial system – while those who did were ignored.
There are those, me included, who feel that although the economy was on life-support due to the collapse of the credit markets, it was the allowed failure of the investment bank Lehman Brothers that truly pulled the plug on the U.S. economy. Even though the recession may not have been averted, we wouldn’t be facing a future quite so dire.
Much ink will be spilled concerning the downfall of Lehman and why the authorities allowed it to happen, after playing a role in the merging of Bear Stearns to JP Morgan Chase, and the takeover of the Fannie and Freddie mortgage giant twins. Explanations range from the belief the system could overcome its demise and that “legal constraints” prevented the Fed from saving Lehman (excuse me?). Chilly credit markets freeze solid, economy in the tank.
So, to bring us up to date, the Bureau of Economic Analysis will announce its first “vintage” of economic performance for the fourth quarter, 2008. It should be ugly, with most predictions coming in at a shrinkage rate of 3 to 6 percent on an annualized basis.
The unemployment rate has recently risen to 7.2 percent which honestly, isn’t that bad all things considered.
But more disturbingly, the rate that includes the non working, not really trying to find a job but wouldn’t mind working, as well as part-time workers who can’t find full-time jobs, has risen above 13 percent.
Additionally, the surge in exports that helped buttress the economy in the first half of last year has changed course due to a stronger dollar and weaker overseas demand (Hey, things are tough all over!).
As for the near future, many economists believe that the fourth quarter of 2008 will represent the bottom or trough of this recession. However, things aren’t likely to get much better soon! With the unemployment rate certain to continue climbing its improvement is likely to lag behind the eventual economic recovery. At best this will come, albeit slowly, in the second half of this year. Hence, the worst may be over, but we’re certain to have a tough slog ahead.
On the bright side, gas is a lot cheaper!