The recession is over

A while back I argued for a short recession.  The rationale had to with inventory.  In most recessions, the inventory levels build to high levels, reducing the need for manufacturing and the like.  It takes years to work off that inventory.  When inventory levels get low, then orders start coming in, and factories take an upturn, and jobs follow.

I’m calling the recession over.  And unlike Jim Cramer, CNBC’s “infotainer” who prognosticates both sides of every issue (and was called to task for it on The Daily Show for it), I have data to back it up.

Inventory levels were so low in this downturn that one of the early signs of recovery, the semiconductor industry, is sharply and quickly rebounding.  Capacity utilization, meaning how busy the factories are, dipped during this downturn from 90% to 60%.  It’s back to nearly 80% as of the second quarter of 2009 (according to the Semiconductor Industry Association).

The semi industry is a great proxy indicator for overall output in the economy, because semiconductors are used in more and more products.  It’s a fairly broad based leading indicator.  It does miss a few things though.

First, it doesn’t feel like the recession is over to those who are out of work, because jobs are a lagging indicator.  Notice that the recession started before people started getting laid off, and it’s ending before people are getting rehired.  Not much comfort for those looking for new jobs, except that the end of your pain is near.

Second, the semiconductor industry isn’t too correlated to America’s housing market, and that’s the one area where inventory is going to overhang for a while.  Home ownership increased to nearly 70% in 2007, running up over the decade from around 63%.  Through April of 2008 (the last data that’s available) it had already declined by several percentage points.  That means there are a lot of extra homes today, some being rented, some not.

Argument for a short recession

While everyone is waiting for the next shoe to drop on our economy (can you say “swine flu”, anyone?), no one is talking too much about the traditional cause of extended recessions — high inventory levels.

Since this was a credit crunch led recession, fears of credit card debt restraining consumer spending are logical.  However, Americans and our government have gotten used to living off of debt.  It’s unlikely to change in the future as credit eases.  We will continue to spend more than we make.

It’s similar to highway deaths.  Cars have gotten safer and safer, but traffic fatalities have remained constant.  That’s because we start driving faster and more recklessly in “safer” cars.  We have a fixed appetite for risk, it seems.  It’s the kind of thinking that makes for an economics best seller like “Freakonomics“.

But it’s inventory levels that will determine what happens next.  And that’s because things break.  Sure, we can delay the purchase of some goods, but as they wear out, they need replacing eventually.  So, some purchasing continues.  If there is too much inventory laying around in warehouses, then that purchasing doesn’t generate any work or new jobs (besides warehouse forklift drivers, perhaps), it just reduces that inventory level.  Once the inventories get low enough, THEN work starts to pick up.

The good news is that inventories are not drastically high in the US.  They are at 2001 levels, and the increase in inventory / sales is driven almost entirely by the decline in sales, not the run-up in inventories.

This is of course an aggregate across all industrial sectors.  The car industry has inventory levels that are much higher.  And we know how that is working out for the manufacturers.  Still, as a nation, we cut back on production quickly and deeply enough that inventories didn’t rise.  The speed of those initial cuts will dictate a shorter recession than many fear, according to this armchair economist.