Recession … or slowdown?

Story by Chris Graham
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University of Virginia professor Peter Rodriguez is avoiding using the word recession right now.
He’s one of the few people that I know of who is doing this, so I want to give him credit.
“My take would be that we have entered a slowdown,” said Rodriguez, a business-administration professor at UVa.’s Darden School of Business, in an interview with me for a story for our upcoming New Dominion Magazine, which is due out in stores and libraries on April 1.

Not that this is exactly great news or anything, you know, as in, Oh, yay, we’re in a slowdown, but I’m hoping that you’re picking up on the nuance here. The word recession is not, as some in the media and many in popular culture seem to believe, the appropriate word to use when the economy is simply not growing at a rate that we would consider gangbusters.

Recessions are when the economy actually takes a step back and contracts. Negative growth, if we can call it that.

Not that there aren’t factors that could push us from slowdown to recession in a hurry in our current economy.

For instance, high gas prices that are obviously entrenched after several years now of being near the $3-a-gallon mark can’t be helping us out any.

“That’s adding a little pain at a tough moment, but it’s not the proximate cause, ironically,” Rodriguez said.

“It really is more a symptom of very fast world growth, which is really something hard to reconcile,” Rodriguez said. “I think it’s something that is interesting about this particular period of slowdown that’s unlike the ones before it. In prior economic slowdowns, the U.S. has really held center stage, and when its economy swooened, the rest of the world seemed to go along with it, or at least the dominant forces tended to come from the United States. As a result, when the United States slowed, world prices for key commodities also fell in a big way. But that’s not happening now, and I think that’s what’s really different this time around.

“It’s just that we’re weaker, our economy is weaker, at a time when so much of the world is booming, almost beyond its natural limits,” Rodriguez said. “And that’s leading to high prices for commodities everywhere. That’s why today, when we seem to be heading into a time that is moderately slowing, we still have relatively high inflation. Those things don’t tend to go together – but they are right now because the rest of the world, in particular, growth in East and South Asia, is proceeding at a very rapid rate, even while we’re decelerating.”

Another factor that we have to keep an eye on in this period of slowdown is the availability of credit. A deepening credit crunch could be a huge wet blanket on our economic turnaround.

“We’re already seeing that banks and lending institutions are much more reluctant to extend credit because of uncertainties. And even though the cost of their borrowing with the Fed rates racing downward, they’re still not pushing money out the other side of the door. And I think that is going to make it a little bit tougher. Everyone is going to have to wait for the dust to settle a little bit, and it’s just coming in at a relatively slow pace,” Rodriguez said.
“It isn’t the beginning of the end, but it is the end of the beginning. We certainly do know a lot about where the significant problems are and have a fairly good read on which markets are the most distressed. But there’s still a reasonable amount of uncertainty about how far the reach is for these credit concerns. And I think that’s going to take another quarter or two to fall out. At that point, I expect investors will feel like they understand the situation, and a little more confidence will return. But for the moment, credit is tight, and it’s going to stay that way for a while,” Rodriguez said.

Getting back to the macroeconomy, let’s now turn to Rodriguez for his assessment on where things are headed after the short term.

“I think we can expect that to endure for another couple of quarters, and I think that the remainder of ’08 is going to be one of flat to no growth,” Rodriguez said.

“I’m not exactly confident that we’re going to experience a classic or textbook recession where we actually have the economy shrink, but we certainly have entered into a notably slower period for the economy. And I expect that to remain through ’08,” Rodriguez said.

Chris Graham is the executive editor of The Augusta Free Press.