CE Week #14: “Recession’s official status officially spooks markets”
Fear fuels dow’s plunge, could extend downturn
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WASHINGTON – The economy’s yearlong downturn, officially declared a recession Monday, could last well into 2009 or beyond, challenging the U.S. government to devise new responses as traditional methods show limited results.
The National Bureau of Economic Research, the private body charged with determining the onset of a recession as well as its end, said Monday that the current downturn met its definition of a recession: “a significant decline in economic activity spread across the economy, lasting more than a few months.”
The downturn began, the bureau said, at the end of 2007 as businesses started slashing jobs – which they have done every month in 2008.
The group did not say how long the recession might last, but the stock market reflected widespread pessimism. After a widely followed index of U.S. manufacturing activity fell to its lowest level in 26 years, the Dow Jones industrial average tumbled 680 points, or 7.7 percent, and the Standard & Poor’s 500 index plunged 8.9 percent.
“This downturn promises to be the worst since the Great Depression in the 1930s,” said Joshua Shapiro, chief U.S. economist at the forecasting company MFR Inc. “We’ve only just started. I can’t see bottoming out until sometime in 2010.”
The slide in stock prices ended a five-day rally, the market’s strongest in seven decades, built on hope that the incoming administration of President-elect Barack Obama could turn the economy around.
A psychology of fear has gripped businesses and consumers and is likely to prolong the recession, said Lee Ohanian, a professor of economics at the University of California, Los Angeles.
“This one has a potential to be longer and deeper than other postwar depressions,” he said. “People are very, very scared and worried. In my opinion the government has created much more uncertainty about the economy than it should have done. So it’s really hard to tell how long this recession could last.”
Government officials reiterated that they would do what was required to turn the economy around.
“While we are making progress, the journey ahead will continue to be a difficult one,” Treasury Secretary Henry Paulson said.
Federal Reserve Chairman Ben Bernanke, addressing members of the Austin Chamber of Commerce in Texas, pledged to use the central bank’s full resources to repair the credit markets and prime the economy.
But “despite the efforts of the Federal Reserve and other policymakers,” he said, “the U.S. economy remains under considerable stress.”
The National Bureau of Economic Research, a nonprofit, nonpartisan research group, was founded in 1920 to study the economy and formally designate each business cycle’s “peak” – when an economic expansion gives way to a recession – as well as each “trough,” when growth resumes after a downturn.
Since 1978, the group has had a special committee in charge of the designation process.
Although a recession is commonly defined as two consecutive quarters of declines in the gross domestic product – a measure of all goods and services produced by the economy – the current downturn doesn’t yet meet that yardstick.
The GDP shrank in this year’s third quarter at a 0.5 percent annual rate but showed growth of 2.8 percent in the second quarter and 0.9 percent in the first quarter.
The bureau, however, uses a variety of indicators, including monthly measures of employment, industrial production and personal income.
Job losses appeared to weigh most heavily. Although the economy normally must create about 100,000 jobs a month to keep pace with population growth, it has lost an average of 120,000 jobs a month in 2008 through October. The unemployment rate stood at 6.5 percent in October, and many economists expect it to climb above 8 percent in 2009.
“The committee found that economic activity measured by production was close to flat from roughly September 2007 to roughly June 2008, while activity measured by employment reached a clear peak in December 2007,” the bureau said.
The organization’s economists “judged that the weight of the evidence” suggested that the economy peaked – and the recession began – in December 2007.
I realize that a recession is really bad, and could possibly result in another depression, which is worse. We brought it on ourselves. We can easily change it. If people would just spend some more money, we’d be fine. Instead, people hear the word recession and think that they need to save up as much money as they possibly can because they expect the worst. I’m pretty sure the reason no one is buying anything is because all of the prices are going up. People wait for the prices to go back down before they buy anything because currently they are outrageous. Since no one buys anything, the companies don’t have enough money to pay all of their workers, so jobs are lost. The people who lost their jobs don’t have enough money to buy anything and the lucky ones who still have their jobs are saving their money and not spending. That is why we are in a recession.
If some of the prices would go down or people would start spending some money again, then our economy would go back up. Seeing as I don’t really see any prices dropping any time soon, however, people need to stop hoarding their money and spend a little bit. Shouldn’t they anyway? It’s the holiday season. There is always millions of dollars spent for this time of the year alone. I think we need to wait until the holidays are over before we really say we are in a recession or not.
Connection: Basically, the economy has been a big problem for a great portion of the year. This connects to our discussions lately about the economy and the fact that we are considered to be in a recession even though the fourth quarter hasn’t ended yet for us to figure it out officially. We have talked about the fact that if people spent more then the economy would go up. We just need to see what happens next before we can really tell if we are in a recession or not.
It seems to me that the term recession is being used a bit prematurely based on the traditional definition. “A recession is commonly defined as two consecutive quarters of declines in the gross domestic product – a measure of all goods and services produced by the economy.” This definition has not yet been met. We had a decline in the fourth quarter of 2007 but experienced growth in the first two quarters of 2008. Just recently we have experienced a decline in the third quarter. The question is, what will the fourth quarter of 2008 look like? Many people are predicting it will be another decline, finally fitting the traditional definition of a recession.
The National Bureau of Economic Research has a different definition that says we are in a recession. The Bureau defines a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months.” They also use a variety of indicators including measures of personal income, industrial production, and employment. Job loss seems to have solidified the findings. 120,000 jobs have been lost each month in 2008.
I noticed that the article said the recession also has a psychological aspect to it. “A psychology of fear has gripped businesses and consumers and is likely to prolong the recession.” This can be a problem if we hope to end the recession as quickly as possible.
Connection: I can connect this to our discussion at the start of class Thursday morning. We discussed how the media may be throwing around the term because it is currently the best story available. “If it bleeds it leads.” This is the best story circulating right now even though it might not be entirely accurate yet. This increases the chances of there actually being a recession now that the story is out. We also talked about how to get out of a recession. Let’s all go out and buy stuff.
Ok, personally I believe that all of this talk of recession has lead to the recession. I have heard many people elaborate on how we may solve this problem, but not once have I heard someone say what caused the recession and then provide any evidence about how they reached their conclusion. The stock market is not based upon anything substantial. You cannot buy stock then go into BestBuy and take a CD, all it is is a non existent part of a company. If that company tanks then there goes your money, it doesn’t even have to tank. It could have a record setting profit margin for the month, but some little girl could fall down the stairs into a pyramid of cacti which then crash into the orange juice and she drowns in a massive tidal wave of orange death, and everyone could sell their stock in anticipation of the bad publicity and the money would disappear. The stock market is a bad idea in my opinion, I know it has redeeming qualities, but to have money simply become nonexistent just seems stupid. I do not believe that we have seen the worst of this recession, but I seriously doubt that it will become anywhere near the scale of the Great Depression, when the media starts throwing that around it is going to cause panic, I am convinced that things will work out in the end and America will still be on top.
Connection: Political Action Committee- I want to start the political action committee to stop the media from terrorizing the American people. Bush wants to fight terrorism maybe he should start by eradicating some of the practices that the media seems to enjoy employing.
I think that it is too early for anyone to claim that there is truly a recession happening right now in our economy. It is a little dramatic to for Joshua Shapiro, chief U.S. economist at the forecasting company MFR Inc. to say, “This downturn promises to be the worst since the Great Depression in the 1930s.” Yet then he says, “We’ve only just started.” How then can he make the call that this recession will be as bad or worse then the Great Depression? “I can’t see bottoming out until sometime in 2010,” he states. That means that we have plenty of time to recover with president-elect Obama on the way and all of his plans for change. Hopefully he has a good plan to change the economy.
We just got the banks out of the hole that they put themselves in and are recovering from the panic of that. Now Federal Reserve Chairman Ben Bernanke, addressing members of the Austin Chamber of Commerce in Texas, pledged to use the central bank’s full resources to repair the credit markets and prime the economy. Wouldn’t that just put the banks back where they were not to long ago? That is a loop hole that I don’t think we should be creating.
Connection: We decided in class that to help the economy when it is bad, such as in time of recession, it is better spend money than it is to hold the money. The more money that is spent, the more money is going to be cycled through the system. People became worried about their money during the bank situation. Now they don’t want to spend that money which is causing the “recession”
I found it very interesting that the United States has to create 100,000 new jobs a month to keep up with the rate of population growth. No wonder there has been a shortage of jobs; maybe the country has finally reached its peak and there just are no more new jobs out there to be created. Probably not, but you never know. I also thought that the point about the faith that the country has vested in Obama was interesting too. “The slide in stock prices ended a five-day rally, the market’s strongest in seven decades, built on hope that the incoming administration of President-elect Barack Obama could turn the economy around.” Although I think it is good that the people have faith in the new administration that they have elected, I do not think that it is wise to depend solely on the new president solving all of the economic problems. People need to start learning how to manage their money so that they know how much they are able to spend without going overboard. I think that it would be worthwhile to offer classes in public schools in the future that educate the population about money management, including banking, loans, and investments. Maybe it could help our future economy at least.
Connection: The faith that people have already put into Obama’s administration fixing the economy quickly could backfire. If Obama can’t get the economy fixed, he would definitely be in trouble in the 2012 election, and the republicans could be voted back into power. That would mean that this year’s election was not an example of party realignment like many people think that it was.
I agree with Bruce on this one. I think its much to quick to be calling this a recession. The second quarter isn’t over yet, and things are seeming a little brighter. The economy seems to be holding on with all its might and isn’t doing so horribly bad. I also don’t think americans realize what a recession or depression is… we won’t get scared or start taking caution until it really hits home and people start losing their jobs and homes locally. When car dealerships and businesses are gone and bankrupt around us, then we will be aware of the full effect of the “Recession”
I agree with Matt; it seems a bit early to be calling it a recession. The economy, more specifically the stock market is very unstable right now. One day its down seven hundred points and then the next it is up over five hundred. At this point anything can happen. With the market being so unstable people should not just toss around the word “recession” because the market runs on emotion and if everyone is calling recession then the markets will go down. We are basically driving ourselves into a recession out of fear. It isn’t helping that economists are saying that this will lead to something worse than the Great Depression. By announcing something like that, you are not going to help in easing the fears of the people or going to stabilize the market. That statement is also not something that should be said unless you know for sure because look at how extreme that was. Just about everyone was out of work, barely any money was flowing and “Hoovervilles” were created. That is the last thing we need to go through again. Twice in less than a century is really bad. Hopefully the new economic plans set forth by President-Elect Obama will turn all of this around.
A Response to Makayla:
I have to disagree about the population needing a class educating students on money management and the like. We have that already, a class called Independent Living. As someone who is currently taking it, I am thanking my lucky stars that it is not a two semester class. I’ll be done with it very soon. I agree that we can’t rely on Barack Obama to fix everything, he may have an agenda, but the American people aren’t exactly all sheeple. The problem with the stock market right now isn’t overboard spending, at least in terms of letting it rebound. It’s a lack of faith in the economy that makes the economy something nobody has faith in. Mr. Kautzman has said as much when tells us it’s a self-fulfilling prophecy. Your question about job creation rates vs population was interesting, but I don’t think that’s a likely answer. Because of decreased profits around the board, businesses are cutting jobs, so the job supply is decreasing, while the population is going up. So it’s not that we’ve reached maximum jobs, we’ve dropped availability which only has the effect of lowering the customer base, which in turn drops the profits of a company, which drops the number of jobs, ad infinitum. So it all comes back to consumer confidence, as opposed to money management.
In response to Renee, I believe that people are currently buying. The upturn that the market saw in the past few days seems to be an indicator of that. I am not sure how much of an influence it is, but when the stock market takes a turn like it did people start to sell. You buy low and sell high, so those that had invested in the stock market began to sell their stock, which in turn depreciates the value of the stock. I believe that this could be a product of that. Also, it is now the time of year where every American is spending like crazy, I had to drive my mom around when she went shopping, it was insane! I have driven around malls during Christmas shopping season and it had never been that bad. I think we should make a new holiday like Christmas in March, June, and September. That way we get more people spending money over the course of the year.
In response to Bruce: I agree with your statement about the term recession being thrown around prematurely.
Although I understand that the economy is doing the worst that it has in a very long time, I think that it has people in a panic and calling it a recession is making the problem worse. For all we know, this could just be a few month long downturn in the economy, but when all of the analysts and newspeople keep on telling the public that we are in a recession and that the economy is plummeting, people get scared. And when people get scared, they don’t spend their money and it makes the situation even worse than it would have been in the first place. Even people who don’t have their money invested in stocks or anything are afraid to spend money because everyone keeps telling them that the country is in a recession and you are supposed to save all of the money that you can. Also, I think that a lot of people associate the word recession with the Great Depression, and so even though the problem may not be nearly as bad as it was then, people think that it is and they get really scared.