The Recession Is Over

Bold prediction No. 1: The recession is over.

Not-quite-as-bold prediction No. 2: We won't find out that the recession is over until early next year.

In spite of all the mistakes the government has made, is making, and will make, one of the oldest economic aphorisms will prove once again to be accurate: Never fight the Fed.

The Federal Reserve has been flooding the economy with cheap money for more than a year now. And the best predictor of future economic performance -- the yield curve -- is flashing bright green.

The yield curve is among the simpler economic statistics. It measures the relationship of short-term interest rates to long-term rates.

When short-term rates rise above longer-term rates -- as they did prior to the current downturn -- it's an almost infallible signal that trouble lies ahead. Economists refer to this as an "inverted" yield curve.

And when long rates are significantly higher than short ones, it's a sign that the economy is ready to start growing again.

Right now long rates are much higher than short rates.

When this happens, banks and other lenders are able to acquire funds -- through deposits and other short-term securities -- at, say, 2 percent. And they are able to make longer-term loans at, say, 6 percent.

So the profit spread on their loans is 4 percentage points. It's practically a license to make money -- and gives banks huge incentives to make loans. These days, banks have plenty of cash to lend because worried individuals and businesses are stashing money into the relative safety of FDIC-insured bank accounts and certificates of deposit.

No wonder the healthy banks are quietly looking for ways to pay back their federal TARP money as soon as possible.

The risk of another Great Depression, while never out of the question, has been greatly overplayed, often for political reasons. With commodity prices on the rebound and the monetary base expanding rapidly, the chances of a deflationary spiral that could trigger a depression grow more remote every day.

Inflation-adjusted wages remain at or near all-time highs, consumer spending appears to be improving modestly, saving rates and productivity are improving, the stock market has bounced off its bottom, and the combination of reduced home prices and extremely low mortgage interest rates have made housing exceptionally affordable and may finally reverse the collapse in that industry.

Unemployment will probably rise for the rest of this year as corporations continue to battle declining profits and are reluctant to take on new workers.

After the 2001 recession ended, large job losses lasted another five months and consistent job creation didn't arrive until the recession had been over for almost two years.

Unemployment is a lagging indicator.

So is the official declaration of the beginning and end of recessions.

The latest one started in December 2007, but we weren't officially notified until Nov. 28, 2008 -- almost exactly a year later.

The National Bureau of Economic Research has the unenviable task of declaring turns in the business cycle. It's run by a careful bunch of economists and doesn't announce decisions until all the evidence is in. Refreshing in an age of haste, but not very useful in helping people know where the economy stands right now.

During the previous business cycle, NBER announced on Nov. 26, 2001, that a recession had started in March of that year. On July 17, 2002, it reported that the recession had ended in November -- the same month we found out we were in a recession!

So by the time we knew the economy had slipped into recession, the recession was over -- although we didn't know that for another eight months.

Actually, the current recession could linger until early summer, which means we probably won't find out it's over until next spring.

And given the inflation risks, the massive budget deficits, and the hostile takeover of the U.S. economy by the Obama administration and the Democratic Congress, we could be ready to slip into another recession by the time we learn this one is over.

The last time the economy was in this much trouble, one recession ended in July 1981 and another began exactly a year later.

Unless the Federal Reserve is prepared to let inflation and interest rates push into double-digits once the economy recovers, it will have to remove much of the monetary stimulus that it has injected since last year. That will slow the economy, as will the Obama administration's tight regulation, wasteful spending, high taxes, anti-growth energy policies, and health-care nationalization scheme.

This assumes, of course, that the politicians allow the Fed to even attempt a return to prudent monetary policy and stable prices. If not, it could be a long time before lasting prosperity returns.

Stagnation is, of course, anathema to most Americans and will eventually set the stage for the revival of Ronald Reagan's free-market wisdom, with its reverence for personal initiative, sound money, and individual liberty.

But why wait?

Contact Bob Rayner at (804) 649-6073 or .