"Is the Recession Over?" - economystified.blogspot.com

[economystified]

Full post at: http://economystified.blogspot.com/2011/03/is-recession-over.html

Talk about mixed signals! Unemployment is up, but we are
seeing growth in GDP. Wall Street’s back on track, but Main Street
continues to stagnate. So which is it? Is the recession over or
what?

The muddle stems from misconceptions about the use of the
word. A “recession” is not a term for “general economic badness.”
It’s actually something quite specific.

Economists typically define a recession as 2 consecutive
financial quarters of GDP shrinkage. Basically, when we go 6 months
producing fewer dollars worth of goods and services then we did in the
6 months before. (Keep in mind though; a recession isn’t something
that appears in nature, or came divinely described on stone tablets.
We could define it as anything we wanted...)

Here’s the rub. The concept was solidified in the
economist lexicon a long while ago, when the US was still a
manufacturing and agricultural focused economy - when our most
valuable output was tangible, finished goods.

In that time period, a shrinking GDP almost always
correlated with growing unemployment. Firms simply were not
productive without retaining a lot of labor. Physical products
require physical activity to be created.

And seeing how we were thriving principally off of tangible
goods production, a firm simply could not grow without hiring a larger
workforce. Inversely, if firms were producing less, they had to be
laying people off as they contracted. Or so the intuition went.

High employment, on the other hand, means more of the
national GDP gets distributed (though the channels we call “wages”).
And with money in the people’s pockets, more and more industries are
willing (and able) to start up, creating products intended for the
people’s consumption, not just industry’s or government’s.

So at that time, GDP growth alone served as a pretty
sufficient barometer of overall economic health, since it was so
indicative/encompassing of other economic indicators: like employment,
wealth distribution and inter-industry stimulation…

Continue reading at: http://economystified.blogspot.com/2011/03/is-recession-over.html