Slouching Toward Recession

In any other week, the blizzard of bad real-economy news this week would have been a major story. Not this week, though, when the bailouts announced on Monday and Tuesday left the economic world in a state of cautious optimism and the stock market actually closed up for the week (admittedly, after a terrible previous week). Let’s just summarize:

• Construction: Housing starts in September were 31% down from a year before, lower than expected, and building permits were down 38%.
• Retail spending fell 1.2% month-over-month in September, after declines in the previous months.
• Industrial production fell 2.8% month-over-month, far more than expected.

And remember, the acute phase of the credit crisis only began in the middle of September when, in the space of four days, Lehman failed, AIG was bailed out, and Paulson and Bernanke announced that we were all in serious trouble. The mood of general panic that set in then and only began to dissipate this past week is only partially reflected in these figures. In case anyone isn’t sure why these numbers matter: when consumers buy less, and companies produce less, that’s when companies lay people off.

I don’t think I’m frightening anyone here, since just about everyone thinks that we’re already in a recession. I just want to reiterate the point that even if the credit crisis begins to lift, the preceding slowdown in the real economy has become a major problem that will need major action to solve. Hence the importance of the discussion of fiscal stimulus that is kicking into gear among both economists and politicians.