Academic journal article ABA Banking Journal

Mapping Recession "Genetics": Are We in a Mild, Average, or Severe Recession? (the Economy)

Academic journal article ABA Banking Journal

Mapping Recession "Genetics": Are We in a Mild, Average, or Severe Recession? (the Economy)

Article excerpt

JUST LIKE PEOPLE, RECESSIONS come in many different shapes and sizes determined by their "genetic" makeup. We have identified ten genetic factors that helped shape the depth and duration of the nine recessions since the end of World War II.

Historically, a "mild" recession lasted less than ten months with small declines in real GDP, jobs, output, retail sales, and interest rates. An "average" recession lasted 11 months with moderate declines in real GDP, jobs, output, retail sales, and interest rates. A "severe" recession persisted for 16 months with large drops in the same key factors.

In early January we used our "genetic analysis" to determine whether the current recession will be mild, average, or severe.

"Mild" recession genes

Inflation is headed lower in the year ahead, although deflation is highly unlikely. Ultra-aggressive Fed easings will help halt the recession this year. We do not expect any additional Fed easings.

Even without passage of a fiscal stimulus package late last year, Congress had cut income taxes by $70 billion in addition to $55 billion in spending on New York City's reconstruction and defense and on financial assistance for the airline industry, equaling roughly a sizable 1-1/4% of GDP in 2002.

Crude oil prices are down sharply despite OPEC's recent agreement to cut oil production in early 2002. Lower energy prices diminish inflationary pressures and help boost global economic growth and corporate profitability.

Inventories are low, especially for vehicles, and holiday retail sales proved to be slightly better than expected. Even modest inventory rebuilding could help end the manufacturing sector's recession this winter.

"Average" recession genes

A weak global economic environment including recessions in Japan and Argentina and weak growth in Europe, Canada, and Mexico will curb U.S. exports. Excessive global manufacturing capacity, especially for semiconductors, telecommunications, steel, vehicles, civilian aircraft, etc. …

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