Is The American Economy In Recession?

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Is the American economy in recession? If you're old enough, you remember a time in the 20th century when that question used to matter a lot. I remember the 1991 recession well, though not fondly. By historical standards, that downturn was mild, but the company I was working for went out of the business, I ran out of money after my job disappeared, and I had to sell my house. To complete the trifecta, my wife left me—job, house, marriage! That last item was not actually a tragedy, and I landed on my feet in 1992.

In 2012 it doesn't seem to matter much whether we're in recession or not because since the fall of 2008, it feels like we're always in recession. Most Americans are liable to ask what's difference does it make?

Well, it does make a difference, albeit a smaller one than before. A shrinking economy implies even more job losses, among other things. Informally, a recession becomes "official" when we get 2 consecutive quarters of no GDP growth or shrinking GDP growth (in real terms). Of course you can not trust the Bureau of Economic Analysis (BEA) as far as you can throw them, so we've got that problem too. But I don't want to dwell on their (lack of) trustworthiness today.

Retail sales have contracted for three consecutive months, which covers the entire 2nd quarter. That fact alone indicates the BEA will have trouble justifying "growth" in the economy on July 27^th when they issue their advance estimate for 2nd quarter GDP. Political careers will rise or fall on the news.

The standard retail sales graph is very strange. We might even say it is an exercise in how to prevaricate (lie, fabricate, misrepresent, distort, etc.) with standard economic data.

Retail sales are now higher than they were before the recession (blue bar). Retail sales are given in nominal terms (i.e. the numbers are not inflation-adjusted). Thus gasoline sales will rise or fall depending in part on the price of a gallon of gas. Graph from Calculated Risk.

And then we get the standard reporting about the economy and retail sales. This splendid text comes from CNN Money's Retail sales decline for third month in a row. I've added some editorial content to spice up the story.

NEW YORK (CNNMoney) -- Retail sales declined for the third month in a row, as consumers grow increasingly concerned over the weakening economic situation in the United States and Europe.

Overall retail sales in June fell 0.5% in the month, according to a Commerce Department report on Monday. The decline came as many were expecting growth, with economists surveyed by Briefing.com expecting growth of 0.2%.

Some Economists

Spending by consumers is an important driver for overall growth, making up more than two-thirds of the nation's economic activity. But consumers seemed to be keeping a tighter grip on their wallets as concerns about slower job creation, stalled global growth and the European debt crisis loomed in June.

"We've seen concerns about a fiscal cliff and about Europe and weaker job growth," said Paul Ashworth, senior U.S. economist at Capital Economics. "Weaker consumption growth has followed in line."

Yadda, yadda, yadda... Yes, there can be no doubt whatsoever that American "consumers" are not spending more money because they're quite concerned about the year-end fiscal cliff and various fiascos in Europe

Alternatively, maybe they're not spending more because they're running out of money! Maybe they can't make ends meet! From Bloomberg's Consumer Credit in U.S. Rises by $17.1 Billion, Fed Says—

Consumer credit climbed more than forecast in May, led by the biggest jump in credit-card debt in almost five years that may signal Americans are struggling to make ends meet.

The $17.1 billion increase, exceeding the highest estimate of economists surveyed by Bloomberg News and the largest this year, followed a $9.95 billion gain the previous month that was more than previously estimated, the Federal Reserve said today in Washington. Revolving credit, which includes credit card spending, rose by $8 billion, the most since November 2007.

A pickup in borrowing coincides with a slowdown in hiring and declines in consumer confidence that indicate the job market is failing to spur enough gains in wages to cover expenses. Employers added fewer workers to payrolls than forecast in June while the jobless rate stayed at 8.2 percent.

Anyway, let's finish up the retail sales thing. Doug Short likes his graphs to reflect Reality, so he adjusts retail sales for inflation and population growth. Here's the result.

You can easily see that the unadjusted red line at the top, which matches the first graph above, keeps getting lower and lower as Doug applies the inflation and population adjustments. Finally we end up with the unhappy blue line at the bottom, which shows that actual sales, as opposed to what we might expect based on the historical trends, are far below their 2007 high. This accords with our intuition about what must be going on.

So is the American economy in recession? Who knows? Mish thought it was, or shortly would be, on June 21, 2012. See his post 12 Reasons US Recession Has Arrived (or will shortly). The June retail sales numbers simply add fuel to this already roaring fire.

But looking at that last retail sales graph, we might safely arrive back where we started about the recession question—what difference does it make? Who cares? We can only hope there won't be further job losses over and above what we "normally" get, but that hope comes with the standard disclaimer.

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