A Lesson in Recession

There will be several recovery-based articles written here in the next few months. That way all the readers here can either learn more about what will be written here by this author in the next few months, what to look for as we recover, or receive a nice, basic refresher course in macroeconomics. Unfortunately, yesterday was not a day worth analyzing due to the full closure of the entire United States economy for Memorial Day. We will not have the closing report from Wall Street or anything until 4:00pm eastern time today.

Everybody knows that a recession is a general slowing of economic activity over a sustained period of time or portion of a business cycle, mostly if Gross Domestic Product (GDP) is down for two quarters. During a recession, many economic indicators will vary in the way they react, but all will fall relatively. This includes production as measured by Gross Domestic Product (GDP), employment (called joblessness during harsh economic times), investment spending, capacity utilization, household incomes and business profits. This is simply due to the fact that money begins circulating slower and there is less to go around. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation, all hoping cash flow will spur. A depression is really only characterized as a recession that lasts longer than a year or two.

Now for the things you may or may not be as privy to. As briefly mentioned in a previous article, the indicators to the longevity of a recession and the possibility of a recovery are leading, lagging, and coincident. Leading indicators are the economic indicators that actually send us spiraling into a recession or jacking back up into prosperity. Lagging indicators react slowly to economic changes, and are therefore worthless as far as prediction goes. They really are best at assessing the current status of a recession, for instance, jobless numbers that are still on an incline even though the worst is over. Coincident indicators are also used to assess current economic conditions but are understood to be simultaneous or sectional and not always related to the entire economy as a whole.

Leading indicators (as found in the Index of Leading Indicators) are:

1. Average number of initial applications for unemployment insurance
2. Number of manufacturers’ new orders for consumer goods and materials
3. Speed of delivery of new merchandise to vendors from suppliers
4. Amount of new orders for capital goods unrelated to defense
5. Amount of new building permits for residential buildings
6. The S&P 500 stock index
7. Inflation-adjusted money supply
8. Spread between long and short interest rates (the yield curve)
9. Consumer sentiment
10. Average weekly hours worked by manufacturing workers

Lagging Indicators (as found in the Index of Lagging Indicators) are:
1. The average duration of unemployment (inverted)
2. The value of outstanding commercial and industrial loans
3. The change in the Consumer Price Index for services
4. The change in labor cost per unit of output
5. The ratio of manufacturing and trade inventories to sales
6. The ratio of consumer credit outstanding to personal income
7. The average prime rate charged by banks

Coincident indicators (as found in the Index of Coincident Economic Indicators) are:
1. Number of employees on nonagricultural payrolls.
2. Personal income less transfer payments.
3. Industrial production.
4. Manufacturing and trade sales.

As the leading indicators begin to show favor, we can start planning on a good recovery. Now remember, a full, solid recovery requires total solidarity under the foundation we’re currently rebuilding. That means a slow, steady recovery with wavering totals and indexes is good. It means that we are building only on the confidence we currently have instead of trying to jumpstart the economy onto a foundation that just is not ready. This author will be following the growth and decline of the economy as it comes and goes, referring to this article to show where we are in the economy, giving the best investment advice from experts all over the country and from myself, relating it to your pockets and your news.