Economy and Media & Marketing

ECONOMIC ANALYSIS: We may be in a recession, but don't expect calamity

October 13, 2008

It will be some months before we know for sure, but I would wager today that the United States is in a recession.

Our unemployment rate is at right about the 50-year average, productivity is up, and living standards never have been higher. Even so, the economy likely has been pushed into recession because uncertainty about credit will dramatically slow hiring and production the next few months. Demand for goods also will be affected. This is financial-market mayhem spreading to goods and labor markets.

We've enjoyed a growing economy for 79 of the last 80 months. The last two recessions we've suffered, the two mildest post-war recessions, were overshadowed by events of the time, Desert Storm and 9/11.

My best estimate-though no econometric model can yet tell us-is that the recession will be a lot like 1990-1991. The actual recession will be brief and modest, but the pain will persist for some months afterward. Since the last major recession was in 1982, you have to be pushing 50 to have been an adult in tough economic times. For that reason, a little perspective is in order.

Napoleon especially valued what he called 3 a.m. courage. It is the ability to remain calm, composed and forwardlooking when information is sketchy but unpleasant. Rudyard Kipling called it keeping your head about you when all others are losing theirs. Now is a good time to follow this advice. A good first step would be to turn off Jim Cramer's "Mad Money."

Recessions, even big ones, actually have a much more modest effect than most believe. A sharp rise in unemployment, perhaps 2 percent or 3 percent, likely will affect one out of every 50 families. This is unpleasant to be sure, but in a normal year, close to two in 10 workers change jobs. A bad recession could be compared to having those turnover folks unable to find new jobs.

Fewer than 15 families out of every 100 will be affected by lower incomes. Most of those affected will be folks working on commissions or in companies that will have to cut back hours. Retail and construction are prime candidates for this slowdown, as are consumer durable manufacturers.

You are about to read a rash of media reports about growing ranks of the destitute, broad job loss and extreme misery. Be skeptical of anecdotes.

If I have learned one thing over the past year or so, it is that we've become so accustomed to good economic times that many of us have lost the ability to tell when times are bad.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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