Economic Hysteria

The economy may be in recession or heading for one. Or it may not. As anyone who reads this blog regularly knows, my view is that we aren't in a recession now and probably won't have one this year. It's a minority view and becoming harder to defend as the official economic stats continue to deteriorate. I may end up being wrong, but based on what I see in my community, I don't think so. When I go to the mall I still have to park further away from the entrance than I'd like. The place is packed. Now, as the Economics Babe recently remarked, a lot of the people in those cars might just be window shopping rather than actually buying anything, but my guess is that if things were really bad, people would just stay home. The bottom line is this: we haven't even had one down quarter of GDP growth yet and we need two consecutive negative quarters to call a recession. We may get there, particularly if people believe too much of what they read in the press, but we aren't even close yet. Robert Samuelson says pretty much the same thing today in the Washington Post (HT Greg Mankiw):

WASHINGTON -- Regarding the economy, it's hard not to notice this stark contrast: The "real economy" of spending, production and jobs -- though weakening -- is hardly in a state of collapse; but much of today's semi-hysterical commentary suggests that it is. Financial markets for stocks and bonds are described as being "in turmoil." People talk about a recession as if it were the second coming of Genghis Khan. Some whisper the dreaded word "depression." Meanwhile, Americans are expected to buy about 15 million vehicles in 2008; though down from 16.5 million in 2006, that's still a lot.

There's a disconnect between what people see around them and what they're told is happening. The first is upsetting (rising gas prices, falling home prices, fewer jobs) but reflects the normal reverses of a $14 trillion economy. The second ("panic," "financial meltdown") suggests the onset of something catastrophic and totally outside the experience of ordinary people. The economy, said The New York Times last week, may be on "the brink of the worst recession in a generation" -- an ominous warning.

Perhaps, but so far the concrete evidence is scant. A recession is a noticeable period of declining output. Since World War II, there have been 10. On average, they've lasted 10 months, involved a peak monthly unemployment rate of 7.6 percent and resulted in a decline of economic output (gross domestic product) of 1.8 percent, reports Mark Zandi of Moody's Economy.com. If the two worst recessions (those of 1981-82 and 1973-75, with peak unemployment of 10.8 percent and 9 percent) are excluded, the average peak jobless rate is about 7 percent.

He also points out that despite all the talk about how bad the stock market is, we haven't even reached the 20% decline that is the benchmark for bear markets. The drop we've had so far only qualifies as a correction. We've had much worse markets in the past, and this one may turn out to be as bad as those, but it hasn't happened yet. A lot of people have asked me why I seem so calm about what is going on; my answer is that panicking will do no good and the economy, if left alone, will recover. The biggest fear I have is that our government will attempt something truly stupid and stall the natural process of recovery. The best we can hope for is that while the politicians are arguing about the best way to "stimulate" the economy, it recovers on it's own and they do nothing.