Headwinds, volatility, mortgage-related assets, CDOs, auction-rate securities, false bottom, recession. “Words, words, words,” as Eliza Doolittle screamed at Professor Higgins’s insistence on precision in their pronunciation and usage. We have been deluged with new and often confusing terms . . . and some old and confusing ones as well.

Most important is “recession”. There is a widespread misunderstanding that we are in a recession when the economy records two quarters of negative growth. So when the GDP growth figure for the last quarter of 2007 was revised from a positive 0.6% to a negative 0.2%, it seemed that one more such negative number and America would be officially in recession. Not so. It is up to the non-profit National Bureau of Economic Research (NBER) to decide if America has slipped into recession, and it doesn’t do so unless in its judgment there is “a significant decline in economic activity spread across the economy, lasting more than a few months”.

If the folks at the NBER spent their days listening to the cries of pain in the halls of such as Merrill Lynch, which has taken write-downs of $46 billion in the past year, and recently sold off some assets at 22 cents on the dollar (and lent the buyer most of the money to complete the sale), they would long ago have signalled “recession”. But if instead they listen to men on the hard edge of the consumer economy, they might think things are booming: Bob Iger, chief executive of Disney, last week reported more than satisfactory earnings growth, especially in the company’s theme parks, and said he saw no sign of recession.

The NBER recession-callers might instead turn for guidance to leading central bankers. But it would avail them little. Gary Stern, president of the Federal Reserve Bank of Minneapolis, thinks the economy is getting worse. He told the Financial Times: “I do not think that the headwinds have diminished. If anything, I think that they are picking up a little.” Which is consistent with the Fed’s survey of business conditions — sluggish consumer spending, declining manufacturing activity, weak residential property markets. Throw in reports of the unwillingness of banks to lend — the $150 billion drop in the past year in credit available to businesses is the largest since the 2001 recession — and you have “headwinds” of gale force.

But simultaneously, many Fed officials are passing the word that their main concern is inflation. The economy continues to grow, at the modest rate of 1.9% in the second quarter (twice the rate of the first quarter, but watch for revisions); exports are up by more than 9%, adding perhaps two percentage points to GDP growth; oil prices seem to be easing; 74% of Americans characterise the financial situations of their house- holds as “very good” or “fairly good”; and even though the jobs market is weakening, the unemployment rate, at 5.7%, remains low by historic standards.

So the NBER team is holding fire on pronouncing whether America is in recession. And, in the end, whatever the NEBR says might be irrelevant. Many observers, among them Democratic politicians in control of Congress and therefore in a position to affect the course of the economy, say that if it feels like a recession, it is a recession. And if it is a recession, we have to act accordingly.

Democrats are calling for restrictions on free trade — no more trade-opening agreements and tighten those already in existence. Never mind that such steam as the American economy currently has is generated by exports — the trade unions, which claim that America has lost 2m jobs to China, are in the saddle and ride Democratic policy.

The same Democrats who want to cut the trade that is giving the economy a boost are demanding another stimulus package. But not one that puts money straight into the pockets of consumers, as the last one did. Instead, they want to hand $50 billion to state and local governments that are experiencing declining property tax receipts. The assumption is that the recipients would spend the funds on infrastructure projects. Lord Keynes is smiling down on the Democrats, or up at them, depending on your view of his current location.

Republicans are less enthusiastic about a second stimulus. They see such a move as pure politics. Ed Lazear, chairman of the president’s Council of Economic Advisers, points out that many cheques are still in the mail from the first stimulus, and that the optimists have been proven right. On this first anniversary of the credit crunch, the problems in the financial and housing sectors have not thrown the overall economy into recession.

The plain fact is that it is very difficult to decide just what is going on. We know a few things. Part of the economy’s problem is high oil and petrol prices. Those prices will not ease until supply increases and demand falls. The latter is indeed happening, as high prices cause reductions in car use. But Democrats in Congress are unwilling to open important offshore and Arctic areas to drilling — Nancy Pelosi, speaker of the house, says it is her mission to “save the planet” by reducing use of fossil fuels.

We know, too, that the financial sector remains shaky. A few banks have already failed, and others certainly will. Deposit insurance has prevented these failures from triggering runs on other banks, but the reports nevertheless unnerve consumers. It does seem, however, that many big banks have survived multi-billion write-downs of loans improvidently made, and that the steps taken by Treasury secretary Hank Paulson and Fed chairman Ben Bernanke to shore up the financial system have prevented systemic failure.

We know that the housing market remains depressed: prices are falling, repossessions are rising, and inventories of unsold homes remain high. Some analysts are encouraged by the slowing in the rate of decline in prices and sales, but they are a minority. Perhaps we will know more when the new legislation to boost the housing market begins to make itself felt in the final quarter of the year. That might give the NBER gurus the information they need to decide whether to call what is going on a “recession”.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

stelzer@aol.com

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