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January 22, 2008: Common Myths Bout Recessions
Tuesday, January 22, 2008
With the markets roiling today, although not as roughly as many economic pundits had predicted before the Federal Reserve announced a three-quarter percent cut in its prime lending rate (from 4.25% to 3.50%), maybe we can exhale and examine what lies in front of us, from an economic viewpoint.

A lot of people are predicting a U.S. recession, if not a global one. Of course, many of these so-called experts have been predicting a recession for five or six years now (I call them "broken clock" pundits because even a broken clock is right twice a day) so their track record is fairly dismal.

But even if we are entering a recession, or at least facing one down, there are certain myths associated with recessions that need to be aired out.

Kevin Hasset, a business writer for The Washington Post, does a great job of that this morning with an article touting common recession myths.

Writes Hasset: "Economists have the same occupational hazard as baseball managers and football coaches: Every person on the street knows their job better than they do. And if you listened to the economic stimulus package talk last week from the White House and Capitol Hill, not to mention Federal Reserve Board Chairman Ben Bernanke, you could be forgiven for thinking that the recession is just around the corner. But the main result of all this chatter is that far too many myths about recessions have made their way into popular culture."

Myth number one, writes Hasset, is that we are already in a recession.

"The truth is, nobody knows. The responsibility for declaring the stages of the business cycle is informally held by that most dreaded of concepts -- a committee of economists. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) uses a number of economic indicators, including personal income, unemployment, industrial production and sales and manufacturing volume, to determine the health of the economy. It's not true that they declare a recession if economic growth is negative for two quarters in a row. If it were that simple, we wouldn't need a committee."

Hasset makes a good point; that The NBER's pronouncements historically come long after recessions have begun, roughly six or seven months after the fact, on average. For example, by the time the bureau announced the recession of 1991, it had already ended.
right now, we can only assess the economy's performance through November, 2007. The next quarterly gross domestic product reading won't come out until March. The best data indicates that, as of last November, the U.S. was clearly not in a recession.

Hasset also notes the myth that the stock market always "tanks" in a recession.

"Not so," writes Hasset. "With the economy heading south during recessions, the conventional wisdom is that stock prices drop as well. Stocks usually drop before a recession, something that may be happening now. However, the market tends to look ahead and starts to respond favorably to the expected end of a recession long before it occurs. Influential economist Donald Luskin of Trend Macrolytics recently ran the numbers and found that stocks have produced an average return of 12.1 percent in post-World War II recessions. This is only slightly below the average return outside recessions."

Of course, that hasn't stopped the massive sell-offs we've already seen this week in the global financial markets. But the facts say the best move may be to grip your armchair, take a stiff drink, and ride out the lousy markets. History tells us that the stock markets recover quickly - - and that you don't want to be on the sidelines and miss out on the big gains.

Even our health improves during a recession, Hasset points out, despite the common myth that we're all lining up to dive off the Golden Gate bridge out of despair.

"David Mamet once told an interviewer that he got the inspiration for his 1984 Pulitzer Prize-winning play "Glengarry Glen Ross" from an account of a salesman's fatal heart attack, caused by a recession "so vicious the competition was for jobs and sales, especially among older men." However, for most Americans, the story is quite the opposite. Americans get healthier as the economy gets worse. Unemployment tends to increase during recessions, but economist Christopher J. Ruhm of the University of North Carolina at Greensboro has found that a temporary one percentage point increase in the unemployment rate leads to a 0.5 to 0.6 percent reduction in the mortality rate, or about 14,000 fewer deaths per year.
Why the health benefits? With more free time and less money on their hands, people tend to consume less tobacco, exercise more, prepare healthier meals and lose weight. In addition, they are much less likely to have car and other accidents, and to catch communicable and sometimes fatal diseases such as influenza. Among the top 10 causes of death in the United States, only suicide rates show a substantial unemployment-driven increase. Even deaths caused by heart disease fall substantially."

So there you have it. Things may not be as bad as we all think. A nice thought on another rough day on Wall Street.

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posted by William Dorn @ 1:25 PM   0 comments
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