If Recession Is Finally Here, Just How Bad Will It Be?
If recessions are best seen through the rear-view mirror, then the government's latest labor market data makes the current state of the economy pretty clear. The road forward, however, will continue to be fuzzy.
For the first time since the recession debate flared in early January, both the jobless rate and non-farm payrolls point decidedly in the direction of recession.
"It has been talked about for months, but now we have the final confirmation that the housing market depression and the seizing up of the credit markets have spread to the broader economy,” declared Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi, in a note to clients. “It is more certain than ever that the economy has entered a recession.”
The data Friday may finally be irrefutable, even for the optimists. The jobless rate jumped from 4.8 percent to 5.1 percent, topping the previous high of 5.0 percent in January. Either level, however, qualifies as a recession indicator, because they are more than half a point higher than the jobless rate low of 4.4 percent set during the economic expansion.
Payroll data were equally depressing. The economy shed 80,000 jobs in January, more than expected, and job losses in the previous two months were revised higher by a combined 67,000. In the past three months, the economy has lost 232,000 jobs.
“The economy just does not come back after three consecutive months of declining payroll jobs,” adds Rupkey.
Now, with even Fed Chairman Ben Bernanke admitting earlier this week that “recession is possible,” the recession debate is now a matter of how long and deep rather than how likely. And that debate's likely to be as contentious and confusing as the first one.
A big factor will be Fed interest rate cuts--past and future—now at 3.00 points and counting. The central bank’s aggressive rate cutting in the 1990-1991 recession helped the economy rebound quickly.
During that period the Fed basically halved rates and economy responded quickly, with the recession lasting just nine months. The Fed’s massive infusion of liquidity and deep rate cuts after the 9-11 attacks are also credited with making the 2001 recession uncharacteristically short and shallow.
“The decline in interest rates is dramatic, “ says Robert Brusca, chief economist of Fact And Opinion Economics. He adds that the “Fed cushioning”--combined with the fiscal stimulus package, which will kick in May when consumers receive the first tax rebate checks--may “prevent a technical recession.”