Earlier this year it seemed the United States would skirt recession or at worst find a shallow bottom and recover handily in the early part of 2009. However, there’s been a dramatic shift in circumstances in the intervening months, and this is no longer a matter of skinny dipping. After the impact of the credit crunch on the “real” economy, the U.S. is heading for a chunky dunk, similar to the 1981–82 recession and bypassing the lesser ones in between.

The classical definition of a recession is two consecutive quarters of negative GDP growth (an economy that is shrinking rather than expanding). Going by this definition, New Zealand was the first developed nation to qualify. The Eurozone and the United Kingdom are halfway there, while Canada, for the most part still going strong, is nevertheless flirting with recession due to its deeply intertwined trade relationship with the U.S.

The major scorecard between all national economies remains the gross domestic product, or GDP, which is the measure of all goods and services produced within each country. In the first quarter of this year, the U.S. GDP printed at 0.9%, meaning that the economy as a whole was that percentage larger in the first quarter of 2008 than it was in the fourth quarter of 2007. In the second quarter, it rose to an astonishing 2.8%—but it’s important to understand that most of that expansion was the direct result of heavy exports, as America’s trading partners around the world had not yet come under the influence of our financial woes.

GDP in 2008

Only in the third quarter of this year has U.S. GDP fallen into negative territory. The first estimate, released last week, printed at 0.3%, which actually wasn’t as bad as most economists expected. However, going by the classical definition of a recession, we’re halfway there and nobody looking at the current situation doubts that we’ll take the next step in the fourth quarter. Just for the record, it’s also expected the first quarter of 2009 will continue this contractionary trend.

The underlying fundamental data to this negative GDP growth include industrial production, which rolled off a cliff in the third quarter as several hurricanes, a strike at Boeing and especially the credit crunch hit. With major corporations around the nation denied access to credit, not only from banks but also from the commercial paper market, plans for corporate expansion evaporated. No new divisions were opened, no new jobs created and no new output processed. Instead, corporations which were actively losing wealth through stock market fluctuations had no alternative but to retrench, cutting some of their established jobs and slicing their output to prevent being stuck with large amounts of inventory that no one wanted to buy.

The Purchasing Manger’s Index

A forward-looking indicator, the Purchasing Managers’ Index, or PMI, surveys the people who purchase wholesale inputs for corporations to measure what and how much they’re buying. This gives an indication, not of where U.S. companies have been, but of where they intend to go, which gives economists an idea of national economic health in the near future. In September, the latest month for which data is available, the manufacturing PMI also fell off that economic cliff, printing at 43.5 with 50 marking the break-even point and 49.9 being the level for August. That’s the lowest PMI since 2001—the last U.S. recession.

All of this shrinking corporate activity will, of course, lead to higher unemployment as jobs are cut and few new positions are created. As families also retrench, more people will need jobs, thus swelling the ranks of job-market participants and therefore the unemployment rate. Currently that stands at 6.1%, 1.4% higher and with 2.2 million more people out of work than this time last year.

The circle of economic stagnation is completed as lower personal income leads to lower consumption, with businesses selling less and earning lower profits as individuals purchase less to make what funds they have go further. The only potentially bright spot in this gloomy picture is that lower demand generally leads to lower inflation, although as our current spate of higher prices is linked to higher commodities rather than surging demand, that is not a given. If commodities prices, particularly crude oil, rise again, then inflation could remain high, as well.

Related posts:

1. Recession With a Silver Lining
2. Seeking a Shallow Bottom: The U.S. Economy Going into the Second Half of 2008
3. More on Recession Proof Jobs
4. The Recession of 1920 – Causes, Responses and Insights
5. Three Clear Markers: The Recession is Over