Jobs data, GDP stoke debate over recession

John W. Schoen Senior producer • Profile • E-mail

Friday's report showing further deterioration in the U.S. job market adds another piece of evidence that economy is headed for — or has already slipped into — a recession. With housing prices plummeting, energy prices soaring and the job market shrinking, this sure feels like a recession to many Americans.

Yet the government reported Thursday that the economy grew at a 1.9 percent clip in the latest quarter, defying the common definition of recession, which is when the economy shrinks for a sustained period.

How is this possible?

A lot depends on how you choose to define a recession. It’s clear that some industries like housing and auto manufacturing, and regions like parts of the industrial Midwest, are already in a recession. Families struggling with flat wages and rising prices are also feeling the same effects that they would if the entire economy were moving in reverse.

To be sure, some economists believe a recession has already begun. Friday's jobs data marked the seventh straight month of job losses, bringing the total decline to 463,000 so far this year. Some analysts point to the recent rise in the unemployment rate as the strongest piece of evidence. Though still relatively low by historical standards, the jobless rate has jumped by more than a percentage point — from a low of 4.4 percent in March, 2007 to the current 5.7 percent. In the past, that kind of move has been accompanied by a recession.

Thursday's report on Gross Domestic Product added to the debate, after the government revised the results for the last three months of last year to show the economy shrank at a 0.2 percent rate during the quarter. That's the first negative quarter for GDP since the end of the last recession in 2001.

But it takes more than a slightly negative reading in one quarter to make a recession. Some sectors of the economy continue to hold up relatively well.

“Outside of housing and autos, it’s not all that bad,” said David Wyss, chief economist at Standard and Poor’s. “Consumers — despite all the griping about high oil prices and despite the lack of confidence — they're still out there spending their little hearts out.”

That spending got a sizable boost after the government handed out $100 billion worth of tax rebate checks. That money provided an artificial — and temporary — lift to consumer spending, which accounts for about 70 percent of GDP. Without that infusion, the economy might have slipped into reverse by now, say some analysts.

Some economists believe that when those checks run out, consumer spending will likely hit an “air pocket” by the end of the year, increasing the odds of a drop in GDP. Falling house prices are also eroding the home equity that many consumers had been relying on to pay the bills during the housing boom.

The current level of consumer angst is also in part due to the result of a longer-term trend of slower growth in personal income, another key piece of the recession puzzle. Though overall GDP continues to grow, the rewards of that growth have been greater for those at the upper end of the economic ladder than for those at the bottom, who are more affected by higher food and energy prices.

“That’s mainly a matter of an economy that’s demanding higher and higher skills to meet the requirements of the work force — and many people don’t have them,” said former Fed governor Lyle Gramley, now an economist at the Stanford Washington Research Group.

Slow wage growth isn’t the only sign that the economy may be running out of steam. But the other data showing signs of trouble aren’t as bad as they've been in past downturns, said Gramley.

“They’re not going down anywhere near as fast as they normally do in a recession,” he said. “So if we’re in a recession, we’re in one that’s not having the kind of cumulative downward tendencies that we normally do.”

The current downturn is also different than past slowdowns because the rest of the world has not followed the lead of the U.S. economy. That strength overseas has helped maintain strong demand for U.S. products and services, helping to offset weak demand at home. But with central banks around the world raising interest rates to fight inflation, there are signs that strength may be waning. Recent economic indicators in Europe have been pointing to a slowdown there.

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