Dancing in the Dark

09/06/2022

Lately it has seemed to be one thing after another. We don’t so much solve problems as simply move on to new problems.

The problem (or potential problem) on everyone’s lips right now is recession, which a lot of economists tell us could occur sometime this year or next. The first question prompted by that prediction might be what, exactly, is a recession?

The National Bureau of Economic Research, considered the final arbiter on such matters, defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

That definition leaves a lot of room for debate, but there is a convenient rule of thumb suggested by economist Julius Shiskin in 1974. A recession is defined by two consecutive quarters in which there is a decline in the Gross Domestic Product.

It is certainly an oversimplification, but in spite of that (or because of it), Shiskin’s rule has become the standard. The GDP fell by 1.6 percent in the first quarter of 2022, and since the preliminary second-quarter numbers show a decline of .9 percent, we may already be in a recession.

The fact that we could be in a recession and not know it says something significant about recessions. Some have been so mild that we didn’t know they had happened until they were over, while others have been so severe as to threaten the fabric of society. Most have been somewhere in the middle.

There have been recessions back almost to the founding of the United States, but the economy, the banking system, and our ability to gather data have changed so much since then that I’m not sure we can learn too much from the earliest downturns. The 20th century might be more instructive.

There were 12 recessions over that 100-year period, but the intervals between them varied widely, and the statistic you often hear about an eight-year average is misleading. Recessions may be separated by a few months or a generation.

The first one, in 1907, was typical of previous financial crises in that it was caused by excessive speculation that led to a run on the banks. What makes it special is that it prompted Congress to create the Federal Reserve System to back up the banks and regulate the interest rates at which they borrow money.

It was a long time until the next recession, but it was a doozy. From August of 1929 through March of 1933, the GDP declined by about 30 percent and the unemployment rate soared to 25 percent. The economy began to recover in the mid-1930s but fell into another recession in 1937. Preparation for the Second World War finally pulled the nation out of the doldrums in 1939.

At least that’s the way economists see it. To historians, it’s all The Great Depression, and it covers the entire decade of the 1930s. I’ve known a lot of people who lived through it, including my parents, and I can tell you that they side with the historians.

At any rate, they all agree that the buildup for the war ended the employment problem, as every available factory was conscripted to make planes, ships, tanks, guns, bombs, bullets, uniforms, and all the other equipment that armies and navies go through. In September of 1940 the U.S. instituted its first peacetime draft and, following Pearl Harbor in December of 1941, it began to call up young men by the millions.

American manufacturing needed workers so badly in the early 1940s that it even overcame its aversion to women and minorities. Anyone with a pulse could find a job. By 1945, however, it was becoming clear that the war would soon be over, and the U.S. began to put the brakes on its astonishing industrial output. Understandably, the economy fell into recession in February of that year.

Many economists were worried that all those men leaving the armed services that summer would make the recession much worse, as the economy would not be able to absorb them. Those fears made sense, but that’s not what happened.

Americans had been asked to make sacrifices on the home front for years. There had been shortages and/or rationing of meat, sugar, rubber, coffee, gasoline, and even soap. They had also been encouraged by the government to save money, partly through the purchase of war bonds, and they had done so.

When you put together all that pent-up demand with all that saved-up money, add in all those returning G.I.’s wanting to make up for lost time, and throw in an exuberant national mood, you don’t get a recession. You get a post-war economic boom of historic proportions.

The boom lasted about 15 years, during which time the U.S. economy more than doubled in size. Over the course of this dramatic expansion there were three recessions, and they followed a familiar pattern: the economy would become overheated, spurring inflation. The Fed would raise interest rates to tamp down inflation, and the economy would slow down too much, resulting in a recession.

To be sure, there were a lot of other factors involved, and I don’t mean to imply that the Fed was solely responsible for those recessions. Further, I would add that the Fed’s ability to slow the economy, and its commitment to containing inflation are good things. Most recessions are relatively short and manageable, but inflation can become entrenched and highly destructive.

So, are we headed into a recession? I can’t tell you, and neither can anyone else. Even celebrity economists are divided, and hedging their bets. Former Treasury Secretary Larry Summers, who predicted our current bout with inflation, says it is “more likely than not.” New York Times columnist and Nobel Prize winner Paul Krugman says it is “less likely than not.” Lesser-known authorities are also about equally split.

You may be wondering how much impact a recession would be likely to have on the toy business. According to NPD Group, the industry was up slightly during the first quarter of this year, despite the slight decline in the overall economy.

I have heard it said that the toy industry is recession-proof, but I don’t believe there is any such thing (except maybe government). The food industry, for example, is considered pretty safe because people have to eat. That’s true, but they can eat less, or waste less, or buy cheaper food, or even grow it themselves. The same logic applies to toys.

During the “Great Recession” of 2008, the toy industry declined at about the same rate as most industries. Each recession has its own characteristics and patterns, but I think that we would probably follow the economy into a recession, and follow it back out into a recovery.

The real question is not about when the next recession will happen, but whether or not we will survive it. That’s one I can answer.

We will.

 


You can e-mail Kevin at kfahy@fwpi.com.

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