Understanding What Recessions Are

One of the misunderstandings about recessions is what actually happens in the real world. A recession is where economic growth stops, and you are left with flat to contracting sales.

Note that economic activity does not grind to a halt -- the year-over-year growth rate merely slips into the negative. This is often misstated, in some variation of "Gee, how can it be a recession -- I was out shopping and the stores were pretty crowded." Whenever you see that, the speaker is either technically misunderstanding what a recession is -- or alternatively, is painfully long and hoping for the best.

Of course, growth may falter, not total economic activity. With the $13 trillion US economy, economic activity certainly won't fall to zero dollars. Everyone is still eating, driving to work, using electricity, phones, buying iPods, etc. If economic activity were to fall to an annual run rate of below $13 trillion dollars for a few quarters, well then there's your mild recession. If it drops much below the $12.75 - 13 trillion dollar range, that's a bit more serious contraction. Indeed, the greater the year over year contraction in economic activity, the deeper the recession.

Consider Housing: Sales don't drop from ~7m homes sold to zero; rather, the number drops significantly (i.e., 4.5m sold). It only seems like nothing after the boom years.

But even if US activity were to drop a huge trillion dollars in a year -- that's still a $12 trillion of economic activity, and that typically involves one or two people still going shopping and out to eat occasionally.

So far, we are only at the point where Real Sales have slipped into negative year-over-year territory. High food and energy prices, as well as health care, are keeping nominal sales positive. Outside of that, we see clothing, autos, homes all negative. Consumer Technology spending and business CapEx spending remain positive.

Indeed, while many aspects of the economy are revealing marked weakness, select areas are still hanging on. We are just as likely to be in a recession -- as not -- as of February 19th, 2008.

Note: We were out and about this past 3 day weekend (it's not all linkfests); one of the things I find interesting is what you can -- and cannot discern -- from anecdotal experiences.

The stores were busy, but not jammed. Discounting was aggressive, reflecting a combination of weak spending and seasonal changeover.

I do not think I could draw the conclusion that we either are definitely in -- or NOT in -- a recession. Too regional, too random.

The most I can conclude is that it seemed a little softer than usual at the outlet center for an off-Summer season, holiday weekend sale.