Much has been made this week by the Fed’s announcement that the first signs of economic recovery are appearing. The news has left many people wondering – if the economy is getting better, why doesn’t it seem like it? There’s a simple reason – economists have a different metric than the rest of us.
Official Definition of Recession and Its End
Officially, a recession is two quarters of negative GDP growth. A depression has no formal definition. When a recession ends, it’s because we have had positive GDP growth again. However, GDP growth doesn’t mean everyone is out of the woods. It simply means that the nation is starting to produce more and government spending is having some effect. If you consider this one factor, the recession is probably over. Unfortunately, the economy is about more than GDP.
The Rest Are Lagging Economic Indicators
If you look at the rest of the factors that go into the American economy during various recessions during our history, you’ll see that incomes, consumer spending, and especially unemployment continue to drag well after the recession officially ends. This is because the producers – our employers – squeeze current employees to boost the bottom line. Incomes and employment don’t start to rise until current employees have become as productive as they can and employers are forced to bring on more people to continue growing. When that happens, incomes can start to rise again and people will feel more secure buying things. That’s why they call these items lagging indicators. They confirm once and truly that the current crisis is over.
What about Housing?
This particular recession is tricky because it was caused by a housing bubble. Unlike the tech bubble, this is taking longer to pop and we will continue to see declines until employment improves. However, the housing problem is more severe in some areas than others, and some areas will stop seeing declines earlier than others. Some that haven’t yet declined will start to. There have also been a range of predictions about how much values will decline. No one can predict who’s right, but we can all say with some confidence that it will continue to be a problem for the next couple of years.
What It Means for You
Basically it means that there’s some light at the end of the tunnel. If you’re out of work, you might start getting calls for interviews again. If you have a job, this doesn’t mean you’re in the clear, especially if you work in a troubled industry or for a failing company. Unemployment often continues to rise after the recovery has started.
It’s also too soon to tell if the recovery will stick or if this is a “dead cat bounce” and it will start to decline again. Being a cautious person, I would invest carefully, but invest indeed. I would try to keep expenses low, but not live like a miser. And I would make sure that I’m still saving money every month. It never hurts to be prepared.