Is the recession over? Officially, the answer is “yes,” even if it doesn’t feel like it yet. A recession is more or less officially defined as two consecutive quarters of negative gross domestic product (GDP). The numbers recently released by the Commerce Department note that the US economy grew at a 3.5% pace from July through September. This report clearly signals that the slippage has stopped and the direction is now positive. (The National Bureau of Economic Research also votes on when recessions and recoveries start; I suspect the timing will be fairly consistent.)
Based on the normal standard, our economy has stepped back from the dark brink of the economic abyss—the deepest we have experienced in more than a generation—and we are now positioned to regain the ground we have been losing since the recession began in December 2007. The third-quarter turnaround marked the first overall increase in our economy since spring last year, when we had a brief uptick. More specifically, it has halted four straight quarters of contracting economic activity.
The growth, of course, was largely fueled by the public’s use of the government’s offering of funds for cars and homes. Partially as a result of the government opening its coffers, sales of consumer big-ticket manufactured goods jumped some 22.3% in the third quarter. Consumers were responsible for about 70% of the overall expansion. Spending on housing (which technically counts as investment in the GDP accounts) also rose by 23.4% during this three-month period.
Among the other contributing factors in the GDP third quarter growth rate was the brisk upswing in federal spending, some 7.9%. And that was on top of the 11.4% growth rate during the April-June quarter. Businesses also hiked their expenditures on equipment and software by about 1.1%, which was the first positive movement in that measure in almost two years. Outlays for physical plants continued to decline.
Another boost to the GDP was the increase in exports of US products driven by both the cheaper dollar (which made the goods more attractive to consumers in Asia, Europe, and various other parts of the world) and the beginnings of recovery in some parts of the world. On the other hand, imports rose even more, which was a dampening factor.
Even so, we aren’t quite out of the woods. Lending by banks is still somewhat depressed and many businesses are continuing to experience difficulties in financing new ventures. Last month, confidence in the economy fell primarily because of the employment situation. Thousands are still losing their jobs and the prospects for substantial hiring appear to be a few months away. With an average work week of only 33 hours, GDP can expand quite a bit before the economy starts to add notable numbers of jobs.
In addition, while consumer spending on goods and services (the largest facet of GDP) was more optimistic than in months past, it is nevertheless not expected to achieve sustained high growth levels immediately. The primary reason for this situation is the amount of available discretionary income. Without an anticipated influx of money, many consumers simply don’t have the capacity to ramp up as much as they might like. As a result, it will likely be more difficult for businesses to keep the future pace of recovery at the third quarter level.
As jobs open up in the future, household incomes will rise and spending patterns will become more positive. We will probably see a few quarters of slow growth before momentum kicks in, but it definitely will. How often does it happen in economic cycles? Always!!!