What do you call a recession where the economy keeps going up and up, even if a bit sluggishly? Well, my friends, you call that an expansion. And that is what we seem to have right now, despite all the economic doomsaying about a recession or even a Great Depression 2.0. Today, the Commerce Department revised its first-quarter estimate of gross domestic product upward to 0.9 percent from 0.6 percent. That follows 0.6 percent GDP growth in the final quarter of 2007. The revision also makes it more likely that the second quarter will be positive, maybe 1.5 percent, maybe even higher.
Now I went back and checked the numbers for the past 50 years and didn't find a single case of a recession—as calculated by the National Bureau of Economic Research—that started with or contained two straight quarters of positive GDP growth, much less three quarters. In a recent interview with the Financial Times, former Federal Reserve Chief Alan Greenspan admitted he was puzzled that the economy hasn't fallen off a cliff, given the housing crisis, credit crunch, and oil price surge. He told the FT: "A recession is characterized by significant discontinuities in the data.... It started off that way—there was a period of sharp discontinuity from December to March. But then it stopped.... No one knows how this tug of war will end—specifically, whether the financial crisis will end before it drags down the real economy."
No one is saying the economy is booming. Clearly, we are in the midst of dramatic slowdown. But even the most ursine of bears has to be amazed by the resilience of the Amazing American Growth Machine. The question now is what to do going forward to allow the AAGM to shift back into high gear. The 2009 election is likely to have a great impact on that, so much so that we may see the effects in 2008. Fears of higher taxes and regulation down the road may cause the stock market to sell off in anticipation of the economy's lower growth potential. Then there's this to worry about, courtesy of the guys over at Strategas Research (bold is mine):
Seven of the ten post World War II recessions occurred in the year following a presidential election. Although many factors can play into a recession, policymakers seek to inject stimulus into the economy in the year of the election. However, this pulling forward of economic activity may reduce growth the following year. With a number of imbalances currently impacting the economy, the $152bn stimulus package may work to minimize a recession in '08, but the effect will be reduced growth in '09 and a significant increase in the deficit with a new Administration entering office. This raises the risk for tax increases in '09 and savvy investors may pull forward economic activity into '08 to get ahead of potential tax/regulatory changes. This further pulls activity out of '09.