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.

US Recession to be Worse than Expected

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.”

Breath, depth and duration are all key qualities to a recession. And though it is too soon to say anything about the duration, there’s data enough to support the view that every sector but exports is struggling. Exports may fuel economic growth, but not employment growth, as seen in the perpetual declines in manufacturing jobs. 

The industrial side, however, has yet to show the deep contraction of the consumer side. The Fed’s Industrial production data, for instance, didn’t show a decline until February.

Another key will be the housing market, which has been in decline since mid 2006 and slumped severely in 2007, shaving something close to a full percent off of GDP. 

“The housing market had been choking on fear,” says Nomura International chief economist David Resler, “But there have been encouraging indications that we are near setting a bottom.”

In that case, housing could become a neutral, if not positive factor, and "set the stage for improvement"

Optimism aside, Rupkey says the unemployment and payroll data clearly “increases the downside economic risks as the unemployed don't have the paychecks in hand to power consumer spending and the economy forward.”

Bernanke himself isn’t expecting much out of the economy in 2008, telling Congress that the Fed doesn’t “expect economic activity to strengthen in the second half of the year,” but won’t return to “its sustainable pace in 2009, bolstered by a stabilization of housing activity.”

Until that rebound, the difference between no growth and slow growth could be subtle, and, in the case of the labor market, invisible. 

During the last recession-expansion cycle, the unemployment rate peaked  in 2003, a year and a half after the recession officially ended in 2001.