Let’s be careful of terms – we are not in a recession

The employment number came in lower than expected. This was a decline for the first time in four years is not a good economic sign. This slowdown should have been expected regardless of the surprise in the magnitude of the employment number. The economy is slowing based on the housing market problem and the credit contraction. However, the size of the sub-prime problem while not trivial is not large relative to the overall size of the mortgage market. The problems are manageable and containable if left to being just a sub-prime problem. Put differently, it is really hard to push the US market into a recession.

Nevertheless, the chances in the near-term of a false positive are high. We can shave off points from the growth rate but to meet the criteria of sustained negative GDP is not easy. There is almost a simple 3% rule. The US economy will grow at 3% plus or minus 3% growth. So maybe we have to set a new standard for a recession relative to what is used by the NBER . One problem with recession dating is that it occurs after the fact. The NBER committee will set the date for the recession but it is not done in real-time.

(Two consecutive quarters of decline in real GDP is commonly taken to be a recession. The National Bureau of Economic Research, a private organization, effectively decides when recessions occur, however, and the actual dating process is determined by judgment rather than a formal rule. See The NBER’s Recession Dating Procedure for more details.)

This does not mean that we will not have further slowdown. This also does not mean that asset prices will not be affected, but we have to be careful on the terms being used. A recession has not begun. The link between macro economic variables and asset prices is not always tight and what may be more important is the momentum of these numbers not the absolute level. We do not need a recession to see more volatile markets.

While I am not positive on the direction of the economy, the process of how we get there will take longer than expected and will not be obvious. The problems are real but have not fully manifested in economic growth. We will have to wait for our recession so we should hold-off on pronouncing its arrival.