AN, the last recession was not a typical recession led by a decline in consumer spending, but a capital spending led recession led by the tech bust. The consumer kept spending. However, commodity prices dropped, and so did the stock markets globally. The only country whose economy kept thriving was China, since at the time they were exporting mostly textiles, and since the consumer kept spending, China kept growing.
8 of the last 10 housing downturns caused a recession. The exceptions are the 2 wars I mentioned. The reason that the Vietnam and Korean Wars prevented a recession during a housing market decline is because wars generate economic activity. Housing is a very large part of our GDP, as it employs contractors to lenders and retailers and uses a lot of commodities. Housing busts lower economic activity enough to cause recessions. Edward Leamer did the original work on this, I think. At least I read his article on it, but can’t find it now. I did a google search and found this chart on housing starts, housing permits, and recession.
I am surprised that there are people doubting the recession. The GDP is already dropping, and some people believe we are already in a recession. It is typical for recessions to be obvious only several months after they start.
The funniest thing is that even economists miss recessions even after they already started!! Then what use are economists?
Roubini:
“in March 2001 in a survey 95% of US economic forecasters predicted that there would not be a recession in 2001; 95% of them! Too bad that the recession had already started exactly in March of that year!. So, even as late as March of 2001 when it was totally obvious that the economy was spinning into a recession 96% of all forecasters were still living in the delusional dream that the US would avoid a recession. This even after the tech and investment bubble had totally busted in 2000; even after the 2000 Chrismas sales were a disaster and growth was already crawling down to zero by the end of 2000; this even after the Fed went into a panic mode on January 2nd 2001 and cut the Fed Funds rate in between FOMC meetings because of the collapse of Chrismas sales and the collapse of the NASDAQ that day
was clearly signaling a coming recession. There was systematic delusional bullish bias among forecasters, among investors and in the Fed.
The failure of professional forecasters in predicting recessions – there are always way overoptimistic and systematically miss the turn downward of the business cycle – is well known and documented in scholarly studies. Prakash
Loungani – who has written several research papers on this systematic bias – summarized the results of his 2001 paper on this forecasting bias with the following scathing remarks: “The record of failure to predict recessions is
virtually unblemished”. That sums it all. Why this ystematic failure? Because there are systematic biases and financial conflicts of interests in the economic forecasting business.”
I don’t think foreigners will pick up the US spending. We’ll have 1 million unemployed construction workers by the end of next year, and countless others in real estate, retail (all those Home Depots laying off)…. The export dependent nations will have a potential recession, as their exports to us decline.