The current economy makes the whole question of recession, especially in the technical sense, pointless.
The classic recession, the one that so many fruitlessly seek in the data, typically centers on business.
Outside real estate, business faces none of the classic signs of recession. It has few excesses in either inventories or past acquisitions of equipment or structures. There is no need for a correction of any magnitude. Outside the financial sector, business balance sheets and even income statements are in good shape, even if they are not growing as rapidly as previously. What is more, the dollar's long decline on foreign exchange markets has improved the ability of domestic manufacturers and other firms to export and compete against imports. If there is no great inducement for expansion, there are no pressing needs for sudden cutbacks, either.
The only aspect of today's environment that is even vaguely like the typical recession is the pattern in residential real estate. Given the monumental excesses reached in residential real estate, the correction will persist for some time to come. Since it is unlikely that mortgage rates will fall any further or that terrified financial institutions will ease newly tightened lending standards, it will take until well into 2009 for the correction to run its course.
Then there is the household sector. In addition to a response to real estate losses, the main issue here is the need to correct for decades of excessive reliance on debt. Debt loads today exceed incomes by 20% or more, depending on how calculated, whereas some 10 years ago that figure stood closer to 80% of income. No doubt, responsible heads of households, now awakened to their predicament, would like to cut back quickly on their outlays, repay some to this debt and correct the imbalance. Unlike business, they cannot lay off some of their dependents or deny the family necessities or even some luxuries. Households, then, will need to make their adjustments differently from how business typically has, dealing with their past excesses more gradually, certainly by forgoing any additional borrowing, perhaps by making minor cutbacks where and when they can, and by using a portion of any additional income to repay debt instead of using it to increase spending, as they might have in the past.
Because the consumer will move more gradually than business would, the economy will undergo a longer, shallower period of adjustment, something very different from the classic, business-driven correction. The much-respected Institute of Supply Management survey sees no recession but also indicates little growth. The employment reports signal neither much hiring nor many layoffs.
The bears keep looking for signs of the steep economic slide typical of many past recessions, and the bulls keep looking for the typical signs of recovery. As both decry the lack of clarity in the data, they miss the fundamental message. The economy is dealing with something atypical.
Instead of the usual, sharp, business-based corrections of the past, today's economy faces a gradual consumer-based correction that promises an extended period of subpar growth.
At the current slow pace of correction, it could take years even to begin to address the debt overhang and longer still to bring relative debt loads back to historical norms. Meanwhile, those who seek a classic recession will remain frustrated, as will those who seek a classic recovery. They will fail to find the particular clarities they seek. Meanwhile, the data make the message of this underlying economic situation crystal clear.
The circumstances will make new demands on individual and institutional investors, perhaps especially plan sponsors. Even after the longer-term contours of this environment become apparent and today's volatility settles down, equities generally should offer returns that are short of the past benchmarks on which so many actuarial assumptions and risk control models are based. Meanwhile, these circumstances offer no special relief for interest rates and the present value of liabilities.
Milton Ezrati is a partner and senior economic strategist of Lord Abbett & Co., Jersey City, N.J.