The Recession Fallacy

For several months now, the plummeting housing market and higher fuel costs have both played a major role in causing the US economy to hit a bit of a snag. This isn't surprising, in any economy there are ups, there are downs. Big-ticket items and necessary expenses in the transportation department can definitely leave a mark.

But this particular period of sluggishness just happens to come at a time, when there is an election looming on the horizon. So when voting and economic downturns both share the same newscasts, it is easy to throw out the term recession and even easier for those not in tune with reality, to buy into these fallacies put forth by those that want us to believe that only they can stop this entire scenario from getting worse.

Here in 2008, we have had many people buying and overbuying into the notion that the US is currently in the midst of it's worst economy ever. Some even go as far as to suggest that we have reached that same low level of consumer confidence as we experienced in the days of the Great Depression. In a cavalier manner, they project this with such utter misguided conviction that they adopt it as fact, without as much as a blink of an eye.

Who can forget the recent article published by the Independent, from the UK? One usually has to attend a Hillary Clinton campaign speech to see such a textbook example of an embellishment (SEE: Sniper Fire). Who can forget the annual negative speculative predictions of those that want it to be so? In 2004 (the last presidential election year), there was a prediction of a recession. John Kerry used jobs as a cornerstone of his campaign. Predictions of a recession also occurred in 2005, 2006, and 2007, well after that election.

It's certainly true that a person who has recently lost his/her job (and struggling to keep the bills paid) will likely feel as though we are in a recession, just as a small business owner or sales manager of a large company (watching sales fall off) will see it this way also. The same can be said of stock brokers who have been watching the downward trend of the Dow-Jones numbers, on a daily basis. But are we really in the midst of a recession?

If we seek to use the historically accepted definition of a recession, the answer is no. This definition can be found in Wikipedia as: A decline in a country's real gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year. The key to understanding this is not hard to understand. Two or more successive quarters of negative growth are needed as critical criteria. An election year or an unpopular GOP president is not required to qualify.

In the first quarter of 2008, the economy grew 0.6%. In the same quarter one year ago, it was 0.5% and in the 4th quarter of last year, it was 0.6%. (Ref: Here) As anyone with a basic knowledge of math can see, we do not meet the specific criteria for recession.

Another criteria many will use as an indicator of recession is the unemployment rate. In April, the jobless rate fell to 5%, from 5.1%. If we were in an active recession we would expect unemployment rates to climb, but such is not the case here either.

Here are some unemployment rates from the recession of 73-75, due to the oil embargo:

1973-4.86%
1974-5.64%
1975-8.48%

(Source: Here)

From the same source comes the unemployment rates of the 82-83 recession:

1982-9.71%
1983-9.6%

The average unemployment rate under Clinton was 5.2, likewise the average rate under Carter was 6.5.

Understand that 0.6% growth or 5% unemployment does not in any way indicate economic health. The figures are nothing to gloat about, as they have looked better. These numbers are indicative of stagnation and growth cannot occur under that kind of dynamic. But when you hear the media and the politicians fronting out the word recession haphazardly and recklessly, hopefully you are smart enough to look at the entire picture well enough, to put it into proper perspective.

But the biggest fallacy in all of this is, thinking that a damned politician can do anything about it. Voting for someone based on them saying they will focus their economic policies on Main Street instead of Wall Street, is foolish. Anyone believes that a President or any other elected official has that much power over a market, knows little to nothing about a free market system. And if they did have that much control, it would not be a free market.