Are Recessions in Recession?

The more articles I read like this, the more I start to feel like we are becoming overconfident in our ability to control cyclical swings in the economy.  It's a worry others have as well:

Have Recessions Absolutely, Positively Become Less Painful?, by David Leonhardt, NY Times: The ... United States has endured an almost biblical series of calamities in recent years - wars, hurricanes, financial scandals, soaring oil prices and rising interest rates - but the economy keeps chugging along at an annual growth rate of roughly 3 percent. It has been able to do so with the help of technology that allows businesses to react ever more quickly to changes. But with little notice, those reactions have also created a new feature of the business cycle: the micro-recession. When one of them strikes, activity slows for a few weeks, sometimes in just certain sectors or regions, as companies adjust to a dip in demand. It has happened much more often in the last few years than in earlier expansions, but growth has picked up each time, thanks in part to the adjustments that businesses have made. No company embodies this change, for better and worse, quite like FedEx. When Alan Greenspan, the Federal Reserve chairman, sees Frederick W. Smith, FedEx's chief executive, during halftime of Washington Redskins games, Mr. Greenspan uses the company's vast reach to check in on the economy. "He always asks, 'We still O.K.?' " said Mr. Smith, a part-owner of the team whose stadium suite abuts the one Mr. Greenspan uses. More formally, Federal Reserve staff members rely on FedEx and the nearly six million packages it delivers every day for real-time data that helps set interest rate policy. ... The business cycle has certainly not been eliminated, as some dreamers suggested during the 1990's boom, but recessions really do seem to happen less often. ... Across the economy, quick reactions, like asking workers to put in more hours one week and fewer the next, have helped lead to the business cycle's new hiccups... At FedEx, the first responders to the business cycle are a group of managers who gather for a worldwide conference call every morning at 8:30 Memphis time. Sitting at a faux-wooden conference table in a spare room, beneath a screen that shows every FedEx plane in the air, they review the last 24 hours of activity. ... Changes like this ... have helped foster the recent economic stability. The amount of inventory that companies keep in their warehouses, in case demand suddenly surges or some boxes become stuck in Oakland, has steadily fallen...

This doesn't fully explain the change in the frequency and duration of business cycles, and a business cycle cannot be detected by "first responders" based upon the past 24 hours worth of FedEx data.  There is a step missing here. The article is a story about very short-run variations in output and how companies such as FedEx smooth such fluctuations on a daily or weekly basis, but that does not necessarily change the duration of business cycles.  With apologies for the quality of the artwork, here are two possible paths for output through time, one that wiggles a lot and has lots of  "micro-recessions" and one that doesn't have any due to innovations such as inventory management changes described in the article:

Eliminating high frequency variation in output is certainly desirable and does stabilize the economy in the very short-run, but, though it is certainly possible to construct models with this property, it is not necessarily the case that eliminating "micro-recessions" also eliminates "macro-recessions."  A step connecting the two needs to be provided. For example, better inventory management may smooth very short-run cycles, but be unconnected to business cycle frequency variation in output brought about by wage and price rigidities. 

There does seem to be increased stability in the last twenty years, but I'm not predicting the end of recessions forever and ever just yet.  And with all the evidence that came out during the Social Security debate on the increased economic risk that households have faced over the last thirty years, it is not clear that increased stability at the macroeconomic level translates into an increase in welfare for individual households.

Comments

[Emmanuel]

I am, for the most part, unconvinced that the US has a newfound ability to endure an "almost biblical series of calamities". Even less believable for me is the premise that improvements in logistics have made the US recession-proof. Sure it's great to know that FedEx has a backup of five planes circling the country on a given night to alleviate logjams (and deplete the ozone layer), but that's all supply-side economics.

My more conventional alternative hypothesis is that novel ways to ensure a continuous supply are contingent on meeting consumer demand. Why do you need to schlep stuff around the globe to the US? Because of consumer demand. Why is demand so strong in the US? Because interest rates have been "accomodative"; i.e., money for nothing. Now, all the catastrophic events described in the article--save for Hurricanes Katrina and Rita--have occurred as the Fed was in the process of reducing interest rates.

Recent data that has been highlighted on this blog and elsewhere--record credit card defaults, soaring personal bankruptcies, falling house values, dropping consumer confidence, etc.--all seem to point out what may well be different this time. Consumer dissavings have a limit, hard as it is to believe. Free money cannot last forever even in Greenspan's Bubbleland. It's swell that squadrons of aircraft are ready if another shipment of minty-fresh Crest is needed in, say, Charlotte, but what if consumer demand for this stuff isn't there to begin with? They've got the story the wrong way around, and the day of reckoning is nigh.

[spencer]

I strongly believe that the improved ability to manage information is a contributing factor to the decline in the frequency and duration of recessions. The internet means that the actual economy is getting closer and closer to the economists models.

My own theory is that recessions occur when the business community makes a mistake -- that is why the consensus never forecast one and it is extremely difficult to get large scale econometric model to generate a recession forecast. But business reaction times means that they can correct the overshoot before it gets too severe so we get a lot of minicycles rather then recessions.

We have only had two recession in the past quarter century so the concept of the 4 year business cyle should be dying.

There are other contributors. Two are closely related.
First, the decline of the importance of the manufacturing sector. Second, the growing importance of imports. Now, when retailers find themselves with excess inventories they cut back on orders to Asian firms much more then orders to other domestic firms.
This means the impact shows up more as a drop in imports -- a postive for gdp -- then a drop in domestic production. This also implies that the multiplier impact is also smaller -- and that is part of the explanation of why the 1990s and 2000s recoveries were weak by historic norms. Maybe weak recoveries are norm for the new cyclical pattern.

One way the new faster reaction time shows up is the faster reaction time for retailers to cut prices.
We are already seeing retailers cut prices for this
X-mas. This is so severe that the seasonal pattern in the CPI has changed. We use to see after X-mas sales and the not seasonally adjusted data showed a sharp drop in prices in January. Now, the NSA adjusted data shows a drop in prices in December and a rise in January.

[anne]

Flexibility and adjustment are what alan greenspan has been preaching for years. I agree. The economy is remarkably resistant to shocks, contrary to the misery mongering of the perpetual bears. There are dangers, always, but we are stunningly resiliant.

[calmo]

Or is it that Finance has now found ways to push those Recesssions into the future and the real tools we are using to make our economy "recession proof" are not fixing anything, just postponing it?
Have to side with Emmanuel.

[Bruce Wilder]

More than FedEx, I would think Keynes -- and, though it pains me to say it, Milton Friedman -- may have had something to do with it.

I wrote a couple of brief comments on Angry Bear recently about deflation and its historic consequences, and it reminded me that a superior understanding of the macroeconomy has guided fiscal and monetary policy since World War II. Look back on what passed for economic policy "thinking" in 1835, 1873, 1893, 1930 or even (to an extent) 1957, and most of what you see is absolutely moronic. Much of it is the equivalent of proclaiming the earth flat, and the danger of sailing off the edge imminent. The longest business contraction in U.S. history was 1873-78, brought on by a bull-headed insistence on going on the gold standard, and an absolute refusal to create a central bank. This, on a virgin continent, at the height of the second industrial revolution, with efficient railroads creating a national/continental market for the first time, and cheap steel, kerosene and coal creating energy for large-scale factories, unlimited immigration, expanding literacy, application of science to industry, etc.!!!

If recessions have become less frequent, it is because expansions have become longer and longer, initiated by prudent fiscal policy and coaxed along by prudent monetary policy. The recessions of 1990 and 2001 were 8 months long, but so were the recessions of 1945 and 1958. Before 1930, the longest business expansions coincided with the Civil War and World War I; other than those events, no business expansion continued for more than 3 years; the only contractions limited to single digit duration were the special cases of 1860 and 1919. Since World War II, we have had two expansions, which exceed 8 years duration and one, which fell just short.

Nixon and Reagan, bless their black hearts, gave us the longest recessions of the post WWII period; Nixon's insane imprudence had something to do with both, as did energy prices. Saddled today with the Worst President Ever_TM, ridiculous fiscal deficits, the advent of "peak oil" and high energy prices, talk of a recession of recessions strikes me as being on a par with declaring the Titanic unsinkable.

[Idaho_Spud]

How old are the reporters who write these stories? Have they even been through a recession? Or were they in college doing frat pranks during the last one?

Fact is, it takes a time for national sentiment to swing. It takes time for companies to plan and enact layoffs, time for people to lose their homes to foreclosure. Time for the 'human interest' stories to make the local pages. We're on the way already. These guys are idiots.

[AA]

Very intesting discussion of the microrecession idea. The comments are quite illustrative too.

[calmo]

Spud's line: "We're on the way already." erects another David Byrne? one for me "We're on our way" (from a rogue CD that my grandaughter planted displacing my coveted Bach Fugues). [I can mount a counter insurgency attack. I must.]
This one too worries me:
"Fact is, it takes a time for national sentiment to swing." Was the recent DC rally just an isolated event? a victory for the media, in a way, for controlling that national sentiment? Should the frequency of these rallies increase would we learn of them through these outlets? Would they be covered in the same fashion as Clinton/Lewinski or W's military record?
As I say, Spud worries me.