1/24/2008

Recession Recession Recession - yadi yadi yada

Are you tired and scared of the recession that is going to be hitting us pretty soon? Do you think this two consecutive quarters of negative economic growth (which economists define it as recession) would throw us in recession? Do you feel threatened that this credit crunch problem, troubled housing market is going to throw out in "great recession" that we are just not used to seeing anymore? Well, worry not guys - because we would most likely not face recession. Even if we are in recession - we wouldn't even know it/feel it.
This website - http://www.american.com/archive/2007/december-12-07/the-great-recession-of-2008 - believes that the economic relief package incentives that Bush has sent would stimulate the economy and prevent a recession. Many economic forecasters expect a growth, the weak US dollar would make American exports more competitive (which would increase economic growth and employment), and the recession thing would not last "several months" to call it as recession. So don't worry guys - we are going to survive - we are going to stick together!

11 comments:

Trinity said...

I think it is foolish to assume there is no threat of a recession. Most of the scare is probably unfounded but there are still some serious problems with the American economic system. The weakening dollar has some good effects for exports but has many negative effects as well. We have only seen the beginning of the credit and housing problems. The Fed injected the economy with a so-called "stimulus package" but it is still not clear whether this will be a smart move in the long-run. People must be very wary of claims that there is no recession threat as well as claims of imminent recession. It is always best to be cautious and analytical of all data when dealing with markets.

Dr. Tufte said...

I think both points are well taken.

But ... if I can turn Trinity's point around, perhaps the problem is that we weren't worried enough about recession back in 2005-6.

In hindsight we know that was correct, but do we really know that the chance of recession is that much higher now? I think it is higher, but modestly so.

Grace said...

I agree with Trinity that most of the scare of the threat of recession may be unfounded. If you believe everything you hear from the media, which is driving this frenzy, then it can become a self-fulfilling prophecy. The media "informs" the public that a recession is on the horizon, so the public starts tightening the spending and increasing the saving. This contributes to the factors that are behind a recession. Also, part of the "stimulus package" that I understand includes tax rebate checks. The checks will stimulate the economy if people cash the checks and spend the money. However, the tendency for many people will be to take the money from the tax rebate and put it into savings or pay off existing debt. So, theoretically it is a good idea, but it's up to the individual to carry out the government's intended purpose: spend the money!

Dr. Tufte said...

The self-fulfilling prophecy is a lot stronger than you suspect. It's actually such a big deal in macroeconomics that there's a graduate macro text called "Macroeconomics of Self-Fulfilling Prophecies".

Gavin said...

Extra Credit - Dr. Tufte
Dr. Tufte I think that there is significant evidence supporting the theories behind the "Macroeconomics of Self-Fulfilling Prophecies." We continue to manipulate the economy to avoid recession and this is nice in the short run. Our debt levels both personal and governmental are unthinkable. Dr. Tufte, do you think that we are building up for a more significant recession in the future. Are you suggesting that the Fed is reactive rather than pro-active? Wouldn't pro-active policies be better for us in the long run?

Grace said...

Extra Credit--Dr. Tufte

Dr. Tufte made a good point that perhaps we weren't worried enough about a recession in 2005-06. This could create two different outcomes: 1)worrying about a recession may lead to a self-fulfilling prophecy or 2)not worrying about a recession may lead to over-confidence in the market.

1)Worrying about a recession may lead to a self-fulfilling prophecy. If we are constantly worrying about a recession, we are going to change our spending habits. The market will suffer because consumer spending decreases. This in turn could contribute to an actual recession.

2) Not worrying about a recession may lead to over-confidence in the market. This is what happened in the real estate market from 2004 to 2006. People were extremely confident in the market to the point of speculating. We now have an over-priced abundant supply of homes on the market. This, I believe, is a contributing factor to recession.

It works both ways.

TheFindlay said...

Dr. Tufte
We know that the chance of a recession is much higher now because if we open our eyes we are in a recession! Furthermore, we have never seen so much greed and corruption as we are getting with the housing mess. The whole is just starting to be dug and optimism cannot change that fact.

TheFindlay said...

Dr. Tufte
If self-fulfilling prophecies weren’t actual, we would not keep the term around. Case in point, “Don’t throw the baby out with the bathwater.” When the Fed starts acting like we are in a huge recession, which they have done and continue to do, the prophecy will be fulfilled. My question is whether or not those in economics think they have the scope to cover all topics and causalities under the infinite economic umbrella? I kind of think they have this perception and that keeps them going.

Reagan said...

Dr. Tufte-Extra Credit

I agree that the idea of self-fulfilling prophecies has merit, however, I don't believe the US thought itself into the current credit crunch and housing crisis. Americans, individuals and businesses, have been careless in regards to finances, savings, and overextending themselves. This is bigger than a self-fulfilling prophesy. In a recent meeting with a group of analysts Warren Buffet reiterated these thoughts and that the market must correct such actions sooner or later. He stated that he wasn't too worried because he is able to capitalize on the situation and the US economy is strong enough to pull itself out, though it won't be for awhile.

Dr. Tufte said...

-1 on thefindlay for spelling errors. Oh, and by the way, it's May now and we're still not in a recession. But ... you are right about the overblown self-image of what economist's can explain.

Gavin: recessions can't be predicted that accurately.

Grace: good point.

ammy100 said...

People must be very wary of claims that there is no recession threat as well as claims of imminent recession
but there are still some serious problems with the American economic system..
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ammy
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