Just a few months ago, people were asking me whether the U.S. was in a recession. At the time, my answer was: No, the economy was simply slowing down. The economy is still showing signs of slowing.
Now, the question that I most frequently get is how bad this recession is going to be? I have even received questions as to how it compares to the Great Depression..
First, I am not fully convinced that we are in a recession. The National Bureau of Economic Research dating committee might eventually disagree with me, but they have yet to declare that we are in a recession.
The bureau's committee looks at four major economic indicators on a monthly basis: industrial production, employment, income and retail/wholesale sales. Here is a brief snapshot of each indicator.
Both industrial production and employment have slowed, but both are still positive. Some may point to the recent labor report that showed jobs declined from last month, but that is a small part of the picture.
Retail/wholesale sales tell a similar story of being down this month, but up from this time last year. Real disposable personal income increased slightly, and real personal consumption expenditures are holding steady.
So declaring a recession right now is still a judgment call.
The general public has its own opinions. My opinion is that we are not in a recession right now. As to whether we are going to head into one, I will commit to this statement: If we enter a recession, it will be a mild one relative to past recessions.
What data do I have to support such a statement?
Each of the past recessions has been less severe than the one before. The economy has experienced only three quarters of decline in real gross domestic product since the 1990-91 recession. Only one quarter of decline in GDP was seen in the 2001 recession, which should dispel the myth that a recession is when we have two successive quarters of decline in GDP.
How does this current situation compare to 1929? It doesn't!
The unemployment rate today is less than 6 percent, compared to the peak 25 percent experienced during the Great Depression. In addition, the financial system was not on sound footing. We all are reading reports about the Federal Reserve's actions and the current banking situation. Bank failures have been common, but the rate of failures over the past decade is much lower than the decade before.
In fact, much of the recent banking news has been focused on the subprime market. Keep in mind that this market accounts for less than 10 percent of all homeowners, according to the Mortgage Banker's Association. Financial institutions are paying for their lax lending requirements; unfortunately, consumers and small businesses might also pay a price as it has spilled over into other areas of the economy.
With the onset of a possible, but mild recession, rising prices have brought the discussion of stagflation to the forefront. Stagflation is when the aggregate price level is rising and the economy is slowing down.
This period of time is difficult for policy makers. To combat rising prices or inflationary pressures, the Federal Reserve can pursue contractionary monetary policy via raising the federal funds rate. Doing so would further contract the economy and restrict financial capital. This mistake has been done before (including the Great Depression).
Today, markets are adjusting. The Federal Reserve is pursuing a very aggressive, and in my opinion, appropriate stance as inflation expectations are holding steady. As each month passes, the Fed will re-evaluate the situation.
Our economy is more resilient today than at any other time in history.
MARK A. THOMPSON IS THE CREE-WALKER PROFESSOR OF BUSINESS ADMINISTRATION AT AUGUSTA STATE UNIVERSITY. HE CAN BE REACHED AT MTHOMPSON@AUG.EDU.