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Worst fallout to come in waning days of recession

December 8, 2008

The Dec. 1 announcement by the Business Cycle Dating Committee of the National Bureau of Economic Research that we are officially in recession came as no surprise. What was surprising and a bit unsettling is that the committee officially dated the recession back to the fourth quarter of 2007. By the committee's reckoning, the United States now has been in a recession for a full year, during which the economy actually grew.

Faithful readers of this column will know that I believed the economy did not enter a recession until late this summer or fall. So, this declaration leaves me more than a little chagrined. Especially since I saw one of the members just a few days ago, and found him pretty upbeat. So goes the vicissitudes of forecasting.

The current recession is now the third-longest since World War II. It also is the only recession in which the economy actually expanded. The summer of 2006 saw the economy grow at a sizzling 5.8 percent. This was followed by a modest decline 0.2 percent in the last quarter of 2007.

In the first and second quarters of 2008, the economy actually grew at rates of 0.9 percent and 2.2 percent, respectively. The financial crisis late in the third quarter of this year caused the economy to shrink by 0.2 percent. Thus, the annual growth ending in third quarter 2008 remained at about the 50-year average of just over 2.5 percent. Employment declines over the same period have been incredibly modest, with about seven-10ths of a percent fewer American's working this October than last.

The committee also took the unusual step of admitting that it would be open to redating the recession as new data became available. This is akin to a football official throwing a yellow flag at the same time he asks for an official review.

What worries me most is that the job losses from the recent financial crisis have yet to be broadly felt. Most of the lost economic activity came from higher gasoline prices and the decline in housing values that slowed residential construction.

We have yet to see the effects on consumer spending that asset value declines may portend. Nor have we experienced the full range of job losses associated with lower demand for consumer durables, housing and other 'big ticket' items that will inevitably be affected by more rigorous credit standards.

Even with the rain of bad news, I am concerned over the lack of perspective on today's economic woes. Comparisons to the Great Depression, for example, are stupid or morally bankrupt (or both). The current recession has seen the unemployment rate creep upward by about a point and a half. In contrast, during the Great Depression it rose by more than 25 percent (and we only really counted white males). History is a great antidote to fear.

Soon, I will issue a forecast for next year. Two things are certain. First, the recession so far has been as pain free as they come, and the second is that it is about to end.

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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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