The Recession That Never Was is Now Over

Never mind. That seems to be the attitude of all the economists and financial journalists that were falling all over themselves to irresponsibly raise alarm bells back in February and March about the horrible recession that was developing. The increase in first quarter real GDP reported Wednesday suggests that there will not be a single quarter of receding GDP this business cycle. There are two main reasons that the current cycle did not turn into a true recession.

GDP Component Trends

First, we take a quick look at the component contributions to real GDP for the first quarter. This is partly because the trends provide important clues about the outlook for second quarter GDP, and partly because we want to note the accuracy of our forecasts (as posted on Monday in the prior Big Picture column).

The key points are:

• Consumer spending was up steadily through the first quarter.
• Exports are booming.
• Business investment in equipment and software is holding up very well.

These points are important because they highlight what went wrong for everyone that three weeks ago was forecasting declines in GDP for the first and second quarter (which was about every major Wall Street firm).

Where Recession Forecasts Went Wrong

The two biggest fears in this business cycle were:

1) That falling home prices would lead to a downturn in consumer spending.

2) That the credit crisis on Wall Street would lead to a true credit crunch.

It is now apparent that neither happened.

The first is apparent in that home prices have been falling now for two and one-half years. The median home price is down anywhere from 15% to 20%, depending on the index. And yet, as noted above, even with high gas prices and declines in payrolls in the first quarter -- consumer spending rose at a steady rate through the first quarter.

There is a dampening effect from lower home prices, but as we noted in a September 25, 2006 Big Picture column nearly two years ago, the impact will be to shave only 0.25% from GDP growth each year.

With the fiscal stimulus now starting, consumer spending will keep rising. By the time the fiscal stimulus wears off, the housing market may well have stabilized. Payrolls will also stabilize. And consumer spending will keep rising.

The great consumer pullback never happened.

The credit crunch also never happened. Total commercial and industrial loans, as released every Friday in the Fed's H.8 report, have been rising steadily the past nine months. Even real estate loans outstanding are up.

Credit is no longer available for Wall Street transactions such as for hedge funds or private equity funds that want to purchase commercial property. Mortgage loans for many are much harder to obtain.

But companies with solid, normal businesses are not having trouble getting credit. Industrial companies in the heartland such as Caterpillar and Johnson Controls are booming. They have ample access to credit.

The credit crisis on Wall Street never turned into a credit crunch on Main Street.

What it All Means

Recession is a term that applies to the entire economy. Recession comes from the word "recede." It means DOWN.

First quarter real GDP was UP. Continued increases in consumer spending and exports will keep GDP growth positive in the second quarter. The fiscal stimulus will see to that.

There will not be a single down quarter for GDP. This is NOT A RECESSION.

Just weeks ago it was common knowledge that "everyone knows this is a recession." There were financial articles that started with "It is no longer in doubt that this is a recession, it is only a matter of how bad it will be." We disagreed then, and we disagree now.

These are very difficult economic times. Growth is well below the long-term trend of 3%. Nevertheless, there is growth. The difference is important.

If this were a true recession, job losses would be much more severe and corporate profits would not be nearly as good.

Instead, what this business cycle ultimately will be seen as is a massive correction in the housing industry that dampened consumer spending and overall growth. It is a long, drawn out correction that has caused much pain.

Because the housing problems touch so many people, it is easy for journalists and analysts to overemphasize housing prices, and similarly, gas prices. The obsession with these two issues blinded many to the reality of the limited mathematical implications of those issues, and to the surprisingly resilient and strong sectors in the economy.

Sentiment is shifting, however. Talk is moving to the nature of an economic rebound.

Yet, we doubt very much that there will be apologies from the vast armies of journalists and economists who sensationalized economic problems. Yesterday, the AP headlines page couldn't even bother with an article noting the first quarter GDP data. Never mind. That would not have left enough room for the article about someone on the Oprah Winfrey show setting the world record for holding one's breath.

--Dick Green, Briefing.com