Understanding the "End of the Recession"

Earlier this week, the National Bureau of Economic Research (NBER) released data concluding that the American recession had ended nearly 15 months ago, back in June of 2009. But for those living outside the world of numbers, also known as reality, the recession is still hitting hard.

Recent data suggests that about 1 in 7 Americans are living below the poverty line, which is a direct result of a "jobless recovery." Unemployment in America has steadily held just under ten per cent for a few consecutive months, and underemployment, a better indication of the job market, shows that almost 19 per cent of Americans are not working the amount of hours they want. With so many having trouble making ends meet, many question how the NBER claimed that the recession ended 15 months ago.

The reason is that a recession is defined only as two or more consecutive quarters of negative GDP growth. The image (see below) shows that negative growth ended in June 2009, preceded by four quarters, or one full year, of negative growth. However, those impacted via the job market, falling credit, and increasing debt will argue that the recession is still a reality for too many.

Courtesy of www.tradingeconomics.com

The chart also tells a tale of a potential double-dip recession. The last two quarters have seen GDP growth decelerate and it is not unlikely for the next report, due in October, to show negative growth, the first criterion for a new recession. To be clear, GDP growth is a net figure, which accounts for inflation. For example, if the real economic output increased 5 per cent, but inflation rose 3 per cent, GDP growth would be reported as 2 per cent.

Inflation can mean either the increase of money supply, which we are seeing today, or the increase in overall prices. A lack of inflation in the American economy is the only reason they are not yet back in a recession, but as the US continues to print money, it is only a matter of time before inflation kicks in.

The reason I point this out is because worries about deflation (a prolong drop in the prices of goods) was brought up at the last Fed minutes, released Tuesday September 21. If deflation some how became a reality, GDP figures could show substantial growth, even though economic output may decrease. But, with the US continuing to print money, ever increasing their debt, it is more likely that inflation will take place before deflation.

What is troubling is that the potential for inflation will co-exist with tepid economic growth. It is highly possible for many Americans to earn next to nothing and be forced to battle increasing costs of goods, which could lead to cost-push inflation, a type of inflation caused by increasing costs to producers (such as raising wages demanded by workers to pay for goods) passing the buck on to consumers. It would just be a never ending cycle only to be resolved by real economic growth, if that ever happens.