U.S. could have recession without drop in GDP
Analysis: Growth isn't everything; jobs and incomes count more
By Rex Nutting, MarketWatch
Last update: 8:50 a.m. EDT April 30, 2008
WASHINGTON (MarketWatch) -- The U.S. economy is in a recession, most analysts say, even though the government reported Wednesday that the economy managed to grow, albeit very slowly, in the first quarter.
Gross domestic product increased at a 0.6% annualized rate in the quarter after a 0.6% gain in the fourth quarter. See full story.
That's awfully slow, but is it compatible with a recession?
Revisiting a quarterly accounting gimmick that may not be an accurate reflection of the economic reality
While some people use the old rule of thumb that a recession is defined as two consecutive quarters of declining GDP, the actual working definition is a bit more nuanced.
According to the economic historians at the non-profit National Bureau of Economic Research, a recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months."
It turns out that you can have a recession without two consecutive declines in GDP (we did it in 2001). Indeed, if the $160 billion in fiscal stimulus has the desired impact on the second quarter, the economy may be on track for the first recession in U.S. history without any quarterly decline in growth.
How can that be? Perhaps because GDP is a pretty crude measurement of economic well-being. It measures the output of the economy, but not some of the things that matter most, such as jobs, income and wealth.
GDP is a quarterly accounting gimmick that may not be an accurate reflection of the economic reality. It includes inventory stockpiling and export growth, things that don't really increase the living standards of Americans.
For the first quarter, almost all the expected growth in the economy came from inventory growth and exports, with very little increase in either the amount of money individuals or companies earned, or in the things American households and businesses bought. We made a little bit more stuff, but it went into warehouses and onto ships, not into our homes and workplaces.
Final domestic sales fell at a 0.4% annual rate in the quarter, the first decline since 1991 and a far better assessment of the economy's health than the 0.6% growth in GDP.
The economic historians who judge whether we've been in a recession use a variety of indicators, including GDP, but also job growth, income growth, industrial output and total sales by businesses.
By all of those measures except GDP, the current data show a recession is probably in progress. (Nothing is set in stone yet, because those numbers could be revised significantly.)
The average person judges a recession mainly on one criteria: Is anyone hiring? If jobs are plentiful, then the economy is doing OK. If jobs are scarce, the economy is poor. By that standard, the economy is struggling, with payrolls down by a total of 232,000 in the past three months. On Friday the Labor Department is expected to report another 80,000 jobs were lost in April.
For individuals, incomes are the other major factor in assessing the economy's strength. After-tax incomes adjusted for inflation have been stagnant since September, even as the population has grown. The pie is being sliced thinner.
On the business side, inflation-adjusted sales have fallen at a 5.2% annual pace in the past three months and are essentially unchanged from six months ago.
Industrial output has also stalled over the past six months, even with the weaker dollar boosting exports.
With GDP showing a small positive number in Wednesday's report, no doubt many people will cheer that the economy has therefore avoided a recession. But that's not what the other economic numbers show. End of Story
Rex Nutting is Washington bureau chief of MarketWatch.
Source: http://www.marketwatch.com/news/story/how-have-recession-even-without/story.aspx?guid=%7b763046C0-872E-4A00-A500-8D29FEF13451%7d&dist=msr_1&print=true&dist=printTop 
