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Paul Krugman on the Definition of "Recession"

Jim Hamilton Becomes a Bear

He writes:

Econbrowser: The oil shock of 2008: Time to reassess the potential for recent oil price increases to contribute to an economic downturn.... [W]hen oil prices started to rise again five years ago, many of us suggested that... because the price was rising much more gradually... [it] should be less disruptive of consumer spending patterns [in the 1970s, and]... oil was still cheaper than it had been historically if you took into account inflation.... [N]either of those claims... [is] true [any longer]....

[E]nergy expenditures had fallen... significantly as a fraction of total income... that, too, is no longer the case... crude oil consumed as a fraction of GDP... fell as low as 1.1% in 1998, but is up to 5.2% so far in the first quarter of 2008.... We've reached the point where American businesses and consumers simply can no longer afford to ignore the price of fuel, and we're getting clear indications of real changes in behavior.... U.S. vehicle miles traveled fell 4.3% in March... gasoline consumption so far in 2008 has been 70,000 barrels/day lower than in the first five months of 2007.... Sales of light trucks manufactured in North America last month were 26% below the level of May 2007... the real value of U.S. motor vehicle production fell by $44 billion between 2007:Q3 and 2008:Q1.... GM this week announced plans to close 4 North American plants, idling an additional estimated 8,000 workers. Ford plans a 15% cut in its 24,000 salaried employees. Continental Airlines announced plans to cut 3,000 jobs in response to higher fuel prices, following similar announcements from United, Delta, and American....

We dodged a recession (at least through most of 2007) despite a dramatic housing downturn. The modern American economy could perhaps also continue to grow through the kind of effects we saw from the oil price spike of 1990. But what if we have to deal with both sets of problems at the same time?

I'm afraid we're about to find out.

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