U.S. may enter 'growth recession' in 2008

New York Yankee Hall of Fame catcher Yogi Berra, noted for his incisive malapropisms, once remarked about his ballclub's prospects, "The future, it ain't what it used to be."

Third scenario: A growth recession

Economist David H. Wang told BloggingStocks Wednesday the U.S.'s economic scenarios are not limited to two. There's a third scenario -- the growth recession.

A seldom-discussed and often misunderstood term, Wang said a growth recession "could wreak almost as much havoc on the U.S. economy as a traditional recession."

A growth recession is a period of low (but still positive) economic growth so anemic, it increases unemployment and a host of other economic ills, Wang said. However, it still does not qualify as an 'official' recession, which the National Bureau of Economic Research defines as two or more consecutive quarters of negative GDP growth.

"As an example, say the U.S. economy grows at the following rates in Q1-Q4 2007: 1%, 0.9%, 0.6%, and -0.5. Technically, this economy is not in a recession," Wang said. "But say also during that period job growth averages about 40,000-50,000 new jobs per month. Under that scenario, unemployment still rises considerably, and many other economic and social indicators will also worsen. That's a growth recession. Technically, it's not a recession, but the damage to the economy is almost as bad."

Most economists argue that the U.S. economy must create roughly 125,000-150,000 new jobs monthly, just to keep unemployment from rising, and accommodate the increasing number of adults eligible for work. Given the above requirement, job creation is "one of two co-equal, critical variables" that the U.S. Federal Reserve uses as the basis for determining monetary policy, the other being the core statistic of monthly Producer Price Index, Wang said. (He added that the Fed, obviously, also monitors many other variables, as well.)

Therefore, the Fed, economists, business executives and citizens have to be on guard for two unpleasant scenarios: a typical recession or a growth recession, Wang said.

The essentials: Profits and jobs

Further, by extension, Wang underscored that along with industrial production, housing starts, corporate earnings, and retail sales, investors should closely monitor the monthly job creation report announced by the U.S. Department of Labor.

"The two primary economic benefits of the United States' form of capitalism are profits and jobs," Wang said. "If either declines, that's a serious economic problem for the system, and given that a growth recession can really reduce job growth, that's all the more reason to remain on guard for a growth recession."