Wednesday, October 22, 2008


What is the economic definition of a recession, and does it really matter? Pundits tell us that by the time it becomes a headline, the recession is almost over. There is some truth to that, as most of the indicators used by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee to determine recessions are somewhat esoteric and not in the public eye.

One of the four indicators used by the NBER does get public notice, however—the unemployment rate. The current decline in employment began in January, and the other 3 indicators—real personal incomes, industrial production, and real manufacturing and sales—began their declines in October to December. In past recessions the jobless rate has been the last to decline, because businesses are usually reluctant to cut jobs until they are sure the decline is prolonged. So one can say that the national recession began in January.

What does that mean regionally? In fact, parts of the rust belt—Indiana, Michigan, and Ohio for starters—have been in a recession for years. Michael Moore’s films have highlighted the blight of Flint, Michigan in particular, his home town. But manufacturing jobs have been moving overseas for years and those states’ economic growth has been shrinking concurrently.

In a recent Santa Barbara News-Press business Roundtable, the consensus was that Santa Barbara and the south coast are weathering this downturn well. This is in part because Santa Barbara is such a desirable place in which to work and live (if one can afford to live here). And local jobs are predominately in the service sector of the economy—in tourism, education and healthcare—which have been the fastest growing segments of the economy in this decade.

There is now general agreement that we are either already in a national recession, or entering one. The question is for how long? The $700 billion ‘mortgage rescue package”, as I call it, will be a big step in arresting the real estate downturn, and hence the banks’ credit crunch that is beginning to affect small businesses who have most of the jobs.

But that is only if the U.S. Treasury verifies there is clear title to the mortgages it is buying. Lenders will attempt to offload the worst of them to the taxpayers, of course. It is the slicing and dicing of the subprime mortgages in particular, in an attempt to make them look better than they are, that is partly responsible for the current troubles. It is causing more foreclosures and delaying so-called ‘workouts’, since borrowers many times cannot find the real owner of their mortgage to negotiate with!

No one knows the value of the distressed mortgages at present or the ultimate cost of the mortgage rescue, as I said in last week’s column. The S&L bailout cost taxpayers $125 billion, after the RTC had disposed of all its assets. The amount of distressed mortgage debt could total $1 trillion this time, out of a total $9 trillion in outstanding mortgage debt.

But real estate has historically been the first sector to lead us out of a recession, according to UCLA Anderson School economist Ed Leamer. So curing the mortgage debt problem is a big first step towards a recovery.

© Harlan Green 2008

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