Commentary

San José, CA – On Friday, Feb. 1, the U.S. Department of Labor reported that the economy lost 18,000 jobs in January, the first decline in more than four years. The day before, a report on new claims for unemployment insurance showed the weekly number spiking up to 375,000, the highest since the job losses after Hurricane Katrina. These reports showing an even weaker job market are another sign that a recession has begun.

Most of the media and even many economists describe recessions as “two quarters (six months) of declining Gross Domestic Product (GDP).” However this is not the actual definition, since the 2001 recession did not have two quarters of falling GDP, instead GDP fell one quarter, rose the next, and then fell again. There are two problems with using GDP, which is a measure of production in the economy. First, the GDP reports are revised significantly three or four times over a course of a year or more. Secondly, GDP is only reported on a quarterly (three-month) basis, so it is impossible to date a recession’s start or end to a particular month using GDP.

The National Bureau for Economic Research (NBER) Business Cycle Dating Committee decides on the official beginnings and ends of recession. In November 2001 the NBER announced that a recession began in March, 2001 saying, “A recession is a significant decline in activity spread across the economy, visible in industrial production, employment, real income and wholesale-retail trade.” They went on to say that, “Employment is probably the single most reliable indicator,” in explaining their choice of March, 2001, which was the high point for the total number of jobs. With industrial production and real income (income adjusted for inflation) already in decline, the job loss in January would mean that employment peaked in December, and that the recession has begun.

The January jobs report also showed weakness spreading from construction and manufacturing, which have been weak for a while, to other industries such as administration and support services, a category that includes temporary workers, state universities and community colleges. While the unemployment rate fell slightly, from 5% in December to 4.9% in January, the percentage of long term unemployed rose to 18.3% of the jobless, up from 16.2% a year earlier, showing that it was harder for many of the unemployed to find jobs. In addition, the Department of Labor lowered their reports on job gains in 2007 from an average of 110,000 per month down to 95,000. This was much weaker than the 175,000 jobs per month added to the economy in 2006.

A year ago both the Federal Reserve (the U.S. central bank) and the Bush administration were saying that the downturn in the housing market was ‘contained’ and was not a threat to the economy as a whole. As the economic weakness spread to the financial firms and the broader economy, optimists argued that the U.S. economy was ‘decoupled’ from the rest of the world, and that continued economic growth there would limit the weakness in our economy through growing U.S. exports.

Then, on Jan. 21 and 22, stock markets from Asia to Europe to Latin America crumbled over fears that the slowdown was spreading from the United States to the rest of the world. In response, the Federal Reserve cut interest rates by three-quarters of one percent on Jan. 22 and then cut another one-half a percentage point, to three percent, at their meeting on Jan. 30. In addition the Bush administration stepped up their push for an economic stimulus package, calling for a tax cut of $600 for each taxpayer and his or her children.

Unfortunately, the Democratic leadership of Congress has gone along with Bush and the Republicans in limiting the economic stimulus to only income tax cuts. Bush’s tax cut leaves out millions of low-income workers who pay payroll but not income taxes and millions of seniors whose main income is Social Security. It also leaves out any expansion of unemployment insurance, which is received by only one-third of the jobless and whose benefits only last for six months. In addition one-third of the Bush tax cut plan is for businesses, which will go to their profits and not lead to more spending. Not only are low-income workers, seniors and unemployed more in need of assistance, they are also more likely to spend their tax rebate and will stimulate the economy more. A better bill is being proposed in the Senate, but there is strong opposition from Bush and the Republicans.

We will not know for a number of months if the recession officially began in December, as the jobs report could well be revised to show a small gain in January. However, a poll by CNN in December showed that most of the American people believed that the recession had begun. No matter what economists decide, for millions of Americans who have lost their jobs or homes or whose communities are being devastated by rising unemployment and foreclosures, the recession has begun.

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