Despite ominous signs, NMSU professor says a recession is a hard call

March 27, 2008 by Justin Bannister NMSU News Center

Nearly one million homes are in foreclosure. Automobile sales are in the tank. One of the largest banks in the world failed this month. These days just thinking of the economy can make a person feel seasick, but is such a bleak picture really a recession?

“Are we in a recession? I don’t know. The answer is, probably,” said Jim Peach, an economics professor at New Mexico State University. He has nearly 30 years of experience studying various aspects of the economy.

Officially, there are no set rules for defining an economic recession. Peach said the belief that a recession needs to be two quarters or more of negative economic growth does not necessarily apply. Instead, a recession is essentially a judgment call made by the National Bureau of Economic Research after examining a number of economic factors. Typically, it will look for a slowdown in economic activity across many sectors and many geographic regions over several months.

Peach believes more economic sectors are in trouble now than in the previous two recessions of 1991 and 2001.

“Clearly we have trouble in the financial sector, housing, automobiles and manufacturing. We also have high energy prices and most recessions since World War II have involved high energy prices.

“One indicator that has never failed for me is to look for statements by high-level policy makers that include the phrase: ‘the fundamentals of the economy are sound.’ When high-level officials make such statements, as Treasury Secretary Henry Paulson, President Bush and others have done recently, we can be very confident that they think something is very wrong with the economy,” Peach said. “They don’t say that when things are looking good.”

He said the overall health of the U.S. economy relies heavily on the psychological mood of consumers, who account for nearly 70 percent of the U.S. economy. Investment accounts for another 12 percent.

“If you scare consumers, you can create a recession,” Peach said. “Investors scare just as easily.”

As a way to ease consumer fears, the Federal Reserve System and the federal government are currently engaged in an effort to inject money into the economy. The Fed has lowered interest rates multiple times in the last few months. It has also made it easier for banks to borrow money.

“The Fed is doing things they haven’t done in 25 years,” Peach said. “This is a dramatic change in policy.”

Additionally, the government is in the process of distributing more than $150 billion in business tax deductions and tax rebates to most people who collect a paycheck, social security benefits or veteran’s disability payments.

Peach said whether these efforts can steer the country out of the current situation is still unclear. In recent history, most economic downturns in the U.S. last less than a year, and any kind of economic stimulus can take months to work its way through the economy. That means by the time help arrives, the economy might already be in the early stages of a recovery.

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