Just When Did Spain Enter Recession?

Dec. 2.08 | About: iShares MSCI (EWP)

The number of people presenting jobless claims in Spain soared to nearly 3 million in November, following a 6 percent rise in registrations over October, providing us with yet further evidence, if we needed it, of the gravity of the situation which is now unfolding before our eyes.

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The Spanish Labor Ministry stated that an additional 171,243 people signed on for unemployment benefits last month, bringing the total to 2.99 million. Year on year the increase was of 42.7%.

Obviously it is hard to make exact forecasts for how the situation will evolve, but on a back of the envelope calculation basis (which is as good as any here, since the degree of undertainty is so large), if the contraction continues at the same pace over the next twelve months, then by December we could have around 50% more unemployed - or a total of about 4.5 million and 15% of the labour force (and rising, of course, assuming we won't hit bottom in 2009).

Basically, since I assume the current rate of contraction (i.e. no further acceleration in the contraction on average, and no significant deceleration), then this is what you might call the median forecast, where upside risks and downside risks more or less balance. Clearly the situation could be worse, but then again it could be better. My instincts tell me that the rate of unemployment creation will accelerate over the next six months, as industry takes a terrific beating, but then may slow down in the second half. I have little doubt that unemployment will still be rising in December 2009, since the earliest I think we could hit bottom would be in 2010, and even this isn't a sure thing at this point.

Now all of this raises another very interesting question: just when did Spain's recession begin? This is a very timely question since the NBER Business Cycle dating committee have just decided that the US recession started in December 2007. They arrived at this conclusion since the apply a rather different methodology to the simple "two consecutive quarters - seasonally adjusted - of contraction." Their explanation can be found here, but the gist of the reasoning is based on this idea:

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion."

So leaving aside all the politically embarrasing side details of how you decide on a recession in terms the public can understand, what really interests economis is identifying that peak, and identifying the peak is interesting since it should then help us decide when we have hit the trough, and as far as economic policy goes both these points are important landmarks.

Now the NBER dating committee say this:

"Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity."

That is, they use these two indicators - employment and domestic output as the indicators - becuase they feel that they give the best measure of where an economy is actually at in any given moment of time. Employment I would have thought was an obvious indicator, but domestic output is important since it strips out all kinds of misleading data-skews from the external trade side.

Now if we look at employment in the Spanish context in terms of the trend in unemployment, you will see in the chart above that the annual change in unemployment altered trend in June 2007. Up to that point unemployment had been falling, while subsequently it started to rise.

Now if we turn to the seasonally adjusted employment data prepared by the INE for the national accounts we find, well surprise-surprise, that the number of people employed in the Spanish economy reached it peak between July and September 2007 (the third quarter). So the Spanish labour market definitely turned in the summer of 2007.

The NBER also offered another measure:

The last monthly measure of production is the Federal Reserve Board’s index of industrial production. This measure has quite restricted coverage—it includes manufacturing, mining, and utilities but excludes all services and government. Industrial production peaked in January 2008, fell through May 2008, rose slightly in June and July, and then fell substantially from July to September. It rose somewhat in October with the resumption of oil production disturbed by hurricanes in the previous month. The October value of the industrial production index remained a substantial 4.7 percent below its value in January 2008.

Well here we could simply consult the INE's seasonally adjusted quarterly industrial output data. And guess what we find - the series peaks in the third quarter of 2007.

So, what am I doing and what am I not doing here? Basically there is no doubt that for historical record purposes, the date July a, 2008 will go down as the date the Spanish economy entered the current recession (or whatever it is we finally decide to call what is happening at the present time). But for economic analysis purposes we should be aware that the last business cycle very clearly turned, and past its peak (thus "entering" recession in another sense of the term) not in the summer of 2008, but rather in the summer of 2007, and thus, if we had all been a little less worried about defending our rears, and a little more concerned about actually getting something done, then obviously the large structural problems which now lie before us could have begun to have been tackled much earlier.