The Economy in Recession? Not in 2007

From columnist David Wessel's column in yesterday's WSJ: "Three-Ingredient Recipe for Recession":

"When we look back next year at this time, it will be clear what caused the recession of 2007-08.

It was basically a triple whammy: Housing prices kept falling, oil prices kept rising and both lenders and borrowers grew more cautious after five years of incaution. The combination was simply too much even for the impressively resilient U.S. economy. The Federal Reserve saw it coming, but couldn't move swiftly enough."

According to the NBER, the national authority on business cycles:

A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in: a) industrial production, b) employment, c) real personal income, and d)wholesale-retail trade sales. A recession involves a substantial decline in output and employment. In the past 6 recessions, industrial production fell by an average of 4.6 percent and employment by 1.1 percent.

Those four monthly economic variables identified by the NBER as the most important recessionary indicators are graphed above (click to enlarge), from 2002- Fall 2007, and would provide no support for the notion that the U.S. economy is headed for recession, at least not yet.

Industrial production, real sales and real income are all growing at a healthy annual rate of 2.5% over the last 5 years, with no sign of slowing down, and employment has been growing about 1.50% over the last 4 years, the average rate for the last 50 years. So the most current economic indicators suggest a healthy economy, expanding at the average rate of an expansionary economy. (I'll update the graph above in another month or two.)

Trading on Intrade.com places odds of a recession this year at 4.5%, rising to 36% in 2008. But for the variables that are most important to the NBER, there is no recession in sight yet. Unless falling housing prices, rising oil prices, and credit tightening start producing adverse effects on employment, output, personal income and retail-wholesale trade, the economic expansion that started in December 2001 will continue uninterrupted into 2008.