Was There a Recession?

Given that the talk of a recession in the U.S. is in any case exaggerated, and the Israeli economy is not afflicted with a terminal ailment, there is no reason for a gloomy forecast.

The Americans also like drama. There, too, the economic commentators have to supply resolute and extreme forecasts, because otherwise their ratings will be in jeopardy. That is why we are hearing more and more about the coming recession, the one that is about to drag the U.S. economy to the bottom of the abyss. And because Israel is attached to the U.S. by an umbilical cord, there is growing fear here of a deep recession.

The accepted definition of a recession in the U.S. is two consecutive quarters of negative growth. But in the meantime there is no hint of negative growth there. The latest figure issued, for the third quarter of 2007, actually indicates rapid growth: an annual rate of 4.9 percent. While it is true that the current U.S. growth rate is lower, it is still a long way to negative growth.

What panicked economists in the superpower (whose GNP amounts to around a third of the world's GNP) was the employment and unemployment rates for December. According to the data, only 18,000 new jobs were added to the economy, in contrast to the 70,000 jobs that were expected. Unemployment rates also rose from 4.7 percent to 5 percent (we should be so lucky). In addition, hovering in the background are the housing crisis, the high price of oil and the fact that the U.S. economy has already maintained growth for six consecutive years and the time has come for a downward turn, i.e., a recession.

Economists are big believers in reward and punishment, so behind the dry figures there also hides a certain sense of guilt. They know that for the last six years American citizens lived in a fool's paradise. The prevailing view was: Eat and drink, for tomorrow will be better. The Bush administration acted without any fiscal responsibility. On one hand, Bush lowered taxes, but on the other hand, he substantially increased spending on defense (in the context of Iraq and Afghanistan). The result was a large deficit in both the budget and the balance of payments, which led to the dollar's weakening.

Alan Greenspan, the former chairman of the U.S. Federal Reserve Board of Governors, contributed to the festivities. He reduced interest rates to an especially low level, 1 percent, and kept it there for a long time, acting stunningly irresponsibly. In that way, Greenspan fed the huge consumption binge and brought about the creation of two giant bubbles that were waiting to pop: the real estate bubble and the stock bubble. Because when interest is so low, it is worthwhile to take loans, to buy cars and redo the kitchen and also to invest in the stock market.

The moment of reckoning came via the sub-prime crisis (the inability to repay mortgages), which led the banks to incur huge losses, as well as stock market declines, reduced private consumption and talk of a recession.

But will the U.S. really spiral into a recession? Not likely. The current Federal Reserve Board chairman, Ben Bernanke, has already lowered the benchmark interest rate by 1 percent to 4.25 percent and he is expected to reduce it further at the end of the month, in order to ease the credit squeeze.

In addition, and this is the most important thing, the U.S. economy is the world's most flexible economy. When there is a crisis and a huge company suffers losses, there is no mercy and no delays. The CEO pays with his head, and thousands of workers go home. There is reorganization, a change in perception and the company quickly moves from losses to renewed growth. That is what happened recently at Citibank, the largest U.S. bank, and at Merrill Lynch, the giant investment firm. Therefore it is quite outlandish to speak of a recession there. It would be more accurate to talk about a slowdown in the growth rate and this too would be for a limited period of six months to a year.

This is an important matter for the Israeli public given the strong ties between the Israeli economy and the U.S. economy. However, it turns out that exports to the U.S. were not the only factor powering growth over the last year. Private consumption also pulled the economy forward. In addition, Israel's budgetary policy is also responsible to a large extent. Finance Minister Roni Bar-On continues to refer to a moderate increase in government spending and Bank of Israel governor Stanley Fischer does not hesitate to raise interest in order to maintain price stability. Real estate and stock share prices are indeed high here, but they are not outrageous bubble prices. And the public, too, even though it has increased the volume of its loans, is still very far from the American frenzy of consumption. Here, we still don't take out a second mortgage in order to buy giant LCD screens.

Given that the talk of a recession in the U.S. is in any case exaggerated, and the Israeli economy is not afflicted with a terminal ailment, there is no reason for a gloomy forecast. It is indeed likely that the economy will not grow next year at a rate of 5.3 percent (as it did in 2007), but even a rate of 4 percent is not bad. It really is the opposite of a recession.