As the debate continues over whether the nation is officially in a recession, some economists say the relevant question is how long a recession will last, since Federal Reserve Chairman Ben Bernanke has voiced concerns about the short-term economic outlook when he testified before Congress last week.
By definition, a recession is a significant decline in economic activity, lasting for two or more successive quarters of a year, which is normally visible in a decline in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales. For all of 2007, the economy advanced an anemic 2.2%, the weakest performance in five years. Consumer spending grew 5.5%, the weakest growth since 2003. GDP increased at an inflation-adjusted 2.2% rate compared to an increased 2.9% in 2006. Depressed housing markets, with foreclosures hitting a record high, and elusive bank credit were contributing factors. The subprime mortgage crisis and high prices at the gas pump created a general lack of confidence among consumers.
Even if we’re not officially there yet, a recession is inevitable, some economists say. “For the last month, all we’re getting is bad news,” says Gerald D. Jaynes, professor of economics and African American studies at Yale University and a member of the Black Enterprise Board of Economists. “When that happens, everyone starts tightening their belts from companies to households and that pretty much makes the recession inevitable.”
The March 2008 unemployment report was the latest blow, with joblessness rising from 4.8% to 5.1%. Last week, Federal Reserve Chairman Ben Bernanke met with the Joint Economic Committee and the U.S. Senate Committee on Banking, Housing, and Urban Affairs, where he discussed the state of the economy and defended the Fed’s
role in last month’s bailout of investment bank Bear Stearns. “Overall, the near-term economic outlook has weakened,” Bernanke told the Joint Economic Committee on Wednesday. “It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.”During his testimony, Bernanke also defended the Federal Reserve’s decision to extend a $30 billion credit line to help JP Morgan Chase buy Bear Stearns. “Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets,” he said. “With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence.”
Jaynes agrees, saying that if Bear Stearns had collapsed, “there would have been a huge panic. The possibility of the downside was just too great to risk.”
Economists are mixed on the effectiveness of other moves the Federal Reserve has made in recent weeks, including the lowering of the discount rate—what it charges to lend money to banks.
“The cuts in the discount rate are designed to reduce mortgage rates and make credit more readily available to ordinary consumers,” says Thomas D. Boston, CEO of EuQuant, an economic and statistical research company in Atlanta, and member of the BE Board of Economists. “However, banks have become so conservative, because of the credit crisis, so the new money made available to them through the Federal Reserve actions is not being loaned out at rates the Fed would like to see. The banks are afraid that they will not have enough cash to meet their internal demands and therefore are reluctant to lend.” The result: “In general, reductions in the mortgage rate have not had a significant effect on investment or on consumer spending,” Boston adds.
The Economic Stimulus Act of 2008 may provide some relief to Americans who receive a tax rebate of up to $600 for singles and $1200 for couples. However, rather than opting to spend it, many Americans may save it or use it to pay down debt—a move that won’t be much help to the economy, Jaynes points out.
A possible bright side could be the economic growth being experienced outside of the U.S., Boston says. “Economies outside of the U.S. are continuing to grow, and they will drag our economy along in the process. In times past, foreign economists relied on the U.S. for growth momentum. The process is reversed today.”