BEST of KMOB in 2010: How to tell whether the economy is in a recession or a recovery--now judge for yourself.

[The week between Christmas and New Year's reprises some of the most popular and commented-on blogs of 2010.  Here's the fifth of five!]

It's difficult to figure out if you just listen to the media.

If you pay attention to what's reported in the news there is, simply put, a great deal of confusion regarding whether the economy is in a recession or a recovery. This is a critical piece of information to have--at sometimes a very personal level.  For example, if you have a small business, you need to know how to plan, order, hire; if you are managing personal investments you'd like to be aware of market trends and if and when to invest; if you are looking for a job, you need to know if you'll be rewarded for your search efforts; if you are a corporate manager you'll need to estimate sales in order to balance projected budgets.  

Thus, knowing how to judge the economic state of affairs is a matter that is confusing to virtually everyone; but, ideally, it would be nice to know with some degree of certainty--if only to know how to plan your personal and professional affairs!  I'll help you today to with a quick-and-dirty way to figure out for yourself what's going on around us when the messages regarding the economy you otherwise are exposed to are so confusing.  A little background first...

It was a higher, perfectly round number of exactly 500,000.

Last week--August 20, at 830am to be specific--the first-time unemployment numbers were announced and guess what? The number was a perfect 500,000 people in the U.S., up from a lower number previously.  This trend upward was significant, in part, because of both it's size and it's direction--so much so that economists at J.P. Morgan revised downward the expected GDP for the second half of 2010 from 2.75% to 1.75%.  To many a one percent drop in expected GDP doesn't sound like much--but it ishuge!  This revised estimate was significant for a very important reason--it pointed to a further slow-down in job growth.  Let me explain...

A GDP of 2.75% signifies the creation of about 200,000 jobs per month, but a GDP of 1.75 points, by contrast, will lead, instead, to only about 100,000 jobs being created each month.  This is where the quick-and-dirty rule comes in for figuring out if we collectively are in a recovery or recession.  Here's how it works:  the U.S. needs about 150,000 jobs each month just to stay even with all the people whonormally are looking for work and coming into the labor force--college graduates, young people graduating from high school, and so on.  When GDP estimates fall below a certain point, that critical, steady-state need for new jobs is missed, signifying we're in a recession.  

Jobs are the key to understanding recession versus recovery.

When the GDP is at about 2.5% we're in sort of a balance between recovery and recession; when GDP exceeds this minimal level, then jobs are being added above and beyond what's needed to sustain steady-state employment and the economy can be viewed as growing.  

The political class this fall will tell you that recovery is happening, or "around the corner"; you'll hear from bureaucrats about what may seem like large, positive jobs numbers being added by government action, but if any of the numbers is below 150,000 jobs, you'll know that the value is not indicative of significant, favorable developments, but instead marks a failure by the economy to rebound--much less recover.  

You can judge for yourself now--instead of being confused by others.

In short, the numbers you can keep track of yourself, like the unemployment numbers reported weekly by the government, and the GDP estimates that are, in part, derived from them--all of these point to job growth numbers that are indicative of recovery or recession.  The pivot point for making this determination is 150,000 jobs that need to be added each month--just to stay even with normal population growth.  

Now you can tell for yourself about what's going on--and not be captive of the political class or the media who report on the political class!  There's no need to wonder, now, about what's going on...you can be your own quick-and-dirty economist.