What If There Was a Recession and Nobody Came?

From today’s IBD:

We keep looking for the much-anticipated recession, but it doesn’t seem to have gotten here yet. Could it be that many of those expecting a downturn were wrong, and the economy’s not going into the tank?
Going out on a limb to predict what the economy will do is a tricky business. It’s possible, though by no means likely, that the economy briefly lapsed into recession late last year or early this year, based on weak GDP data, falling home sales, rising oil prices and a jump in unemployment. We won’t know for sure until months — maybe years — after it ends.
Even so, we were struck by Thursday’s news that second-quarter GDP was revised up from 1.9% to 3.3%, more in line with boom than bust. The consensus estimate was for 2.7% growth.
As more than one economist has noted, nearly all of that growth — some 3.1% of it — came from stronger exports, a result of the weak dollar. The rest came from inventories. Take those away, and the economy crawled at a weak 0.2% pace for the quarter.
Fair enough. But we did our own calculations. The slowdown in the economy is mainly due to one thing: housing. We indexed overall GDP to housing GDP back to 2000.

As the chart shows, it’s a very stark picture. We crunched even more numbers. Since 2006, the economy minus the ailing housing sector has grown at an average 3.3% rate. Add housing back in, and GDP growth has averaged just 2.4%. So housing’s collapse has cost us roughly 1% of GDP.
Housing is still weak, with sales off 35% year over year and values depreciating at double-digit rates. Banks can’t boost lending much, since they’re writing off old loans and have to shrink capital. This will take time.
But listening to the media and the Democrats in Denver, you’d think the economy was in a depression. Well, it’s not. In fact, we’re modestly optimistic. By the end of this year, all the really bad year-to-year comparisons in growth will be over. Sales and prices will start to look more normal. And the panic will leave the market.
As noted, exports have supported the economy this year. To critics, a stronger dollar means export growth will slow. Maybe so. But falling oil prices mean our import tab will also drop.
Moreover, oil demand now is falling. The Energy Department recently reported a shocking statistic that got little attention: U.S. demand in June plummeted 1.17 million barrels a day from last year, and a spokesman said prices could fall below $100 a barrel due to rising output in the U.S., Brazil and Canada.
Other data also suggest grounds for optimism. Just this week, the Census Department reported median household income hit $50,233 in 2007, after inflation, a gain of 1.6% since 2001.
Despite the slowdown in growth, the number of people without health insurance fell one million last year, while the poverty rate was unchanged at 12.5% of the population. And believe it or not, the average unemployment and poverty rates under President Bush have been slightly lower than under President Clinton.
Sure, bad things can happen. But we don’t have to will them into existence. As it stands, the much anticipated recession — thanks to Bush’s tax cuts and timely Fed actions — might just be a no-show.

Posted by Eddy Elfenbein on August 29th, 2008 at 11:42 am

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