John Mauldin clarifying some “Recession” confusion (denial) that’s been going around lately.
Also a correction on some housing numbers.
“The 2 consecutive quarters of GDP contraction is not the only metric for identifying recessions. According to the econo-geeks at the National Bureau of Economic Research, a recession is defined as a “significant decline in economic activity spread across the economy, lasting more than a few months.” Here’s their specific language:
“ ‘Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, ‘a significant decline in economic activity.’ Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.’”
“Hence, if we follow what the people who actually determine what is and isn’t a recession say about the matter, and not just limit our analysis to GDP, then it’s pretty clear we are now experiencing an economic contraction.”
Real (inflation-adjusted) retail sales have been flat for the last six months. Incomes are stagnant. Consumer spending is showing every sign of slowing even more. Unemployment is rising (see more below). Consumer sentiment is at 25-year lows. You can count on it that the NBER will show a recession starting the fourth quarter of last year and continuing at the least through the first quarter of this year. This one could last another six months. I still think long and shallow with a very slow recovery.
One last point. The US population grows by about 1% a year. Thus economic growth should increase by at least 1% for the US to stay even on a per capita basis. Thus, at least with regard to GDP per capita, the US is definitely in a recession. And if you use real-world inflation data, we are also in a mild recession.
Housing Numbers Are Better Than I Wrote
Sometimes I just flat out get things wrong. And last week I blew it. William Helman, among others, pointed out to me that the 974,000 new-home construction number I used includes multi-family dwellings as well. I knew that, and just forgot. So, let me let William give you the real story:
“I am a loyal reader and I enjoy your weekly letters. Now and then there is an interpretation of the data that I fail to agree with. The letter of April 26, 2008 is a case in point.
“In the section headed ‘If You Are in a Hole, Stop Digging’ you state that the building industry is building over 400,000 more homes than they are selling. You infer this by subtraction new home sales (single-family) for March of 526,000 from housing starts for the month of 947,000.
“First, you should note that single-family housing starts for March were 680,000 (annual rate) and 267,000 (annual rate) were multi-family, or apartments/condos, thus totaling 947,000. The comparison with home sales, which are single-family home sales, should be with single family home starts.
“Second, single-family home sales exclude the construction of single-family homes by owners – persons who buy a lot and contract to have a house built on the lot to live in and not to sell.”
When you subtract out apparent construction of homes by owners and not builders, William presents data that suggests builders are building less than they are selling, which would make sense.
“… However, when we consider the apparent inventory of existing homes for sale along with newly constructed homes, there is a very large excess supply. That suggests that the excess supply of single-family homes on the market, relative to past norms, is between one and 1.5 million units. This is equal to about one year of ‘trend’ single-family home production. At the current rate of new single-family home construction (a 680,000 annual rate, or about 400,000 to 500,000 below ‘trend demand’), it would take at least two years and possibly three years or more to work off the excess.
“Of course there is a lot of uncertainty in trying to estimate future home construction in this way. The demand and the supply are not necessarily, and probably not, at the same places. Thus some of the inventory may remain in excess for a much extended period, while in other places the excess may become exhausted quickly, thus spurring increased new construction more quickly.
“On balance it seems clear that housing starts are likely to remain subdued and well below trend for an extended period. But this is because of the large inventory of new and existing homes for sale. It is not, as you indicated, because builders are currently building more homes than they are selling. Builders are building less than they are selling. Still, this is not to say that sales will not decline further, causing an even further decline of starts before leveling or beginning a gradual recovery.”
I stand corrected.