Economic Notes: Green Shoots
4/10/2009
Between 1945 and the current downturn, the U.S. experienced ten recessions. The contractions lasted, on average, ten months; the longest (there were two) ran 16 months.
The current recession, which began in December 2007, is about to eclipse the post-war milestone for duration. We won’t know until after the fact whether it also sets records for depth (e.g., foregone output, job losses, etc.).
Recession weariness is palpable and even die-hard empiricists are prone to seeing “green shoots” (the metaphor du jour) where the data are merely less awful than expected.
Since expectations are largely extrapolations, they are an irrelevant benchmark for analysis. Having “record losses” give way to “smaller declines” may surpass expectations, but nevertheless the pie is smaller than it had been. Where is the green shoot (i.e., budding growth) in that?
At the end of 2008, the economy was contracting at a rate of 6.3% as consumers and businesses curtailed spending and the global slowdown cut into exports. Only the public sector expanded, due to Federal efforts to counter the recession and stabilize the financial system.
In two weeks, the Bureau of Economic Analysis will issue its advance estimate of gross domestic product for the first quarter (Q-1) of 2009. Expectations are that the economy shriveled at about the same rate as at the end of 2008.
If the economy meets expectations – or if it shrinks less than expected – have the green shoots of recovery sprouted? In a word: No. Green shoots are evidence of real growth, irrespective of the accuracy of expectations.
Some of Q-1’s data suggest a slowing in the velocity of decline. For example, retail sales behaved favorably in January and February – relative to the dismal data for the last half of 2008. Are they green shoots? Is this a sign of a newly energized consumer?
An answer may be found in the Federal Reserve’s report on consumer credit through February. (Consumer credit consists of credit cards, auto loans, and other intermediate-term financing, excluding loans secured by real estate.)
As the accompanying chart shows, Americans reduced their outstanding credit balances for the fifth time in the last seven months. All of the reduction was in “revolving” credit (e.g., credit cards), while non-revolving credit (e.g., car loans) rose marginally.
In other words, the uptick in consumer spending occurred as households bought food, clothes, and even cars (pre-owned rather than new) – to replace what they had used – and increased their savings.
Household savings will add to the economy’s long-term potential. In the short run, however, it will reduce consumer spending and, cet. par., delay recovery.
The green shoots have yet to sprout.
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For more information, contact Patrick O’Keefe, director of economic research at J.H. Cohn, at pokeefe@jhcohn.com or 973-364-7724.