In2HiDef
02-17-2009, 01:13 PM
If you think this recession is the worst since World War II, chances are you weren't born or working during the downturns of the 1970s and '80s, you're listening to President Obama too much or you're a white-collar worker in financial services.
If all three are true, you may even think we’re on the verge of another Great Depression.
At this point, the only thing that may be true is your age and employment status.
“The current situation has nothing in common with the Great Depression,” says economist Steve Hanke of the Cato Institute and Johns Hopkins University. “The sooner they stop spinning the bad news story and say nothing, the sooner we’ll be more confident.”
Hanke is not alone in dismissing what appears to be a potent cocktail of misinformation and doom and gloom, wherein the current recession—now in its 13th month—is already considered worse than the 16-month ones of 1973-1975 and 1980-1982.
“We were pretty scared in ’82; things looked horrible for awhile," says Bob Stovall of Wood Asset management and a 55-year veteran of the securities business. “I don’t think you can say it’s worse than then; its different. You have changed the landscape but you did that in the Midwest when you forced a lot of rust-belt companies to the wall."
“This time it's financial firms going out of business, instead of manufacturing ones, and the jobs are going with them," explains Stovall.
“I do think that's part of it,” says Robert Brusca, chief economist at Fact & Opinion Economics, saying that. “They’re the ones making the pronouncements. People in the financial sector are getting crushed.”
They’re not the only ones selling doom and gloom, though.
“I don’t remember a president talking down the economy as much as President Obama,” says economist Chris Rupkey of Bank of Tokyo-Mitsubishi. “The economy is very psychological. There’s a herd instinct.”
That herd instinct kicked into overdrive after the sudden collapse of Lehman Brothers, when many say the economy fell off a cliff and a classical cyclical downturn merged with a nasty one-of-kind credit crunch. So yes, economists agree things are bad, but they need to be put into perspective.
Employment
At this point, the current recession is worse than those of the '70s and '80s by only one statistical yardstick, and that’s the unusually quick ascent in the jobless rate—from 4.4 percent in March 2007 to 7.6 percent in January 2008.
“People are reacting so adversely to this is because the job market has become so weak,” explains Brusca.
But even though the sharp decline in payrolls over the past three months has been stunning, it is not as bad on a percentage basis as one period in 1974-1975, according to David Resler, chief economist at Nomura International. Resler says the economy would have to lose some 767,000 jobs a month over a three-month period from the current employment level to match that miserable performance.
During the 1973-1975 and 1980-1982 periods the unemployment rate almost doubled (4.6-9.0 percent, 5.6-10.8 percent, respectively), which means a peak of about 8.6-8.8 percent this time around. In further contrast, during a ten-month stretch in 1983-1983, the jobless rate was above 10-percent.
Nevertheless, that’s nothing compared to the Great Depression when the unemployment rate went from 3 percent to almost 25 percent in four years and national income was halved, notes Hanke in a recent column.
Growth
Thought it may be little consolation for the millions of unemployed, GDP is considered by economists to be the best and broadest gauge of a recession.
That may seem also peculiar since the economy actually grew in the first two quarters of this recession, but some of that had to do with the Federal Reserve's early and aggressive interest rate cutting and the federal government’s first stimulus plan which quickly put money into people’s pockets.
Given that backdrop, GDP contraction thus far has been modest. It’s down 1.1 percent vs. 3.1 percent in the 1970s period, says Chris Rupkey.
And though the economy shrunk at a 3.8 percent annualized rate in the fourth quarter of 2008 and is expected to decline another 4.0-6.0 percent in the first quarter of 2009, imagine the reaction today to the 7.8 percent plunge in the second quarter of 1980 or consecutive swoons of 4.9 percent and 6.4 percent in 1981-1982.
"Half of the workforce until now hadn't seen more than 16 months of recession—total," quips Resler. The past two short (eight months) and relatively shallow.
During the 1990-1991 recession, the deepest quarterly GDP decline was 3.0 percent; in the 2000-2001 one it was 1.4 percent.
“GDP hasn’t been that weak because the productivity increase is one of the best,” says Brusca. “You get a quarter or two that really knocks the level down,” he adds, and it looks like we’re at that stage now.
This time other fundamental factors are playing a bigger role than the past.
“Consumer spending will be bad,” says Resler. “We haven’t three consecutive quarterly declines in consumer spending since the 1950s.” He’s definitely expecting a repeat of that.
It’s Still Bad
Comparisons aside, no one is saying the current recession isn’t a painful one, and some see very little reason for optimism.
“I can't identify anything than looks good,” says Dean Baker, co-director of the Center for Economic Policy And Research, adding that business investment—which appeared to be holding up—posted its sharpest decline in 50 years in the final quarter of 2008.
“I'd be shocked if we have growth this year,” says Baker, even though he expects the Obama administration’s stimulus plan to have a sizable economic positive impact.
So may the words of the President and his advisors, say economists.
“It’s not surprising that politicians exaggerate this,” says Resler, who predicts “The tone of the message is going to start changing immediately; now that we have the stimulus in hand, you enhance it by saying positive things.”
Tunnel Thinking
For all the comparisons with other recessions, exaggerated or not, the most meaningful one may be its duration. It is also the toughest.
The consensus is this recession will end sometime between the second half of 2009 and the beginning of 2010. The pessimists say wait till next year—period.
David Jones, CEO of DMJ Advisors, is among those who see “hints of stability.” By that he means, the rate of decline in areas like retail appear to be slowing.
“We'll see the same thing happening on the housing side in the next couple months,” says Jones.
“I'm just waiting for the shift in people’s expectations,” adds Rupkey.
[I]
If all three are true, you may even think we’re on the verge of another Great Depression.
At this point, the only thing that may be true is your age and employment status.
“The current situation has nothing in common with the Great Depression,” says economist Steve Hanke of the Cato Institute and Johns Hopkins University. “The sooner they stop spinning the bad news story and say nothing, the sooner we’ll be more confident.”
Hanke is not alone in dismissing what appears to be a potent cocktail of misinformation and doom and gloom, wherein the current recession—now in its 13th month—is already considered worse than the 16-month ones of 1973-1975 and 1980-1982.
“We were pretty scared in ’82; things looked horrible for awhile," says Bob Stovall of Wood Asset management and a 55-year veteran of the securities business. “I don’t think you can say it’s worse than then; its different. You have changed the landscape but you did that in the Midwest when you forced a lot of rust-belt companies to the wall."
“This time it's financial firms going out of business, instead of manufacturing ones, and the jobs are going with them," explains Stovall.
“I do think that's part of it,” says Robert Brusca, chief economist at Fact & Opinion Economics, saying that. “They’re the ones making the pronouncements. People in the financial sector are getting crushed.”
They’re not the only ones selling doom and gloom, though.
“I don’t remember a president talking down the economy as much as President Obama,” says economist Chris Rupkey of Bank of Tokyo-Mitsubishi. “The economy is very psychological. There’s a herd instinct.”
That herd instinct kicked into overdrive after the sudden collapse of Lehman Brothers, when many say the economy fell off a cliff and a classical cyclical downturn merged with a nasty one-of-kind credit crunch. So yes, economists agree things are bad, but they need to be put into perspective.
Employment
At this point, the current recession is worse than those of the '70s and '80s by only one statistical yardstick, and that’s the unusually quick ascent in the jobless rate—from 4.4 percent in March 2007 to 7.6 percent in January 2008.
“People are reacting so adversely to this is because the job market has become so weak,” explains Brusca.
But even though the sharp decline in payrolls over the past three months has been stunning, it is not as bad on a percentage basis as one period in 1974-1975, according to David Resler, chief economist at Nomura International. Resler says the economy would have to lose some 767,000 jobs a month over a three-month period from the current employment level to match that miserable performance.
During the 1973-1975 and 1980-1982 periods the unemployment rate almost doubled (4.6-9.0 percent, 5.6-10.8 percent, respectively), which means a peak of about 8.6-8.8 percent this time around. In further contrast, during a ten-month stretch in 1983-1983, the jobless rate was above 10-percent.
Nevertheless, that’s nothing compared to the Great Depression when the unemployment rate went from 3 percent to almost 25 percent in four years and national income was halved, notes Hanke in a recent column.
Growth
Thought it may be little consolation for the millions of unemployed, GDP is considered by economists to be the best and broadest gauge of a recession.
That may seem also peculiar since the economy actually grew in the first two quarters of this recession, but some of that had to do with the Federal Reserve's early and aggressive interest rate cutting and the federal government’s first stimulus plan which quickly put money into people’s pockets.
Given that backdrop, GDP contraction thus far has been modest. It’s down 1.1 percent vs. 3.1 percent in the 1970s period, says Chris Rupkey.
And though the economy shrunk at a 3.8 percent annualized rate in the fourth quarter of 2008 and is expected to decline another 4.0-6.0 percent in the first quarter of 2009, imagine the reaction today to the 7.8 percent plunge in the second quarter of 1980 or consecutive swoons of 4.9 percent and 6.4 percent in 1981-1982.
"Half of the workforce until now hadn't seen more than 16 months of recession—total," quips Resler. The past two short (eight months) and relatively shallow.
During the 1990-1991 recession, the deepest quarterly GDP decline was 3.0 percent; in the 2000-2001 one it was 1.4 percent.
“GDP hasn’t been that weak because the productivity increase is one of the best,” says Brusca. “You get a quarter or two that really knocks the level down,” he adds, and it looks like we’re at that stage now.
This time other fundamental factors are playing a bigger role than the past.
“Consumer spending will be bad,” says Resler. “We haven’t three consecutive quarterly declines in consumer spending since the 1950s.” He’s definitely expecting a repeat of that.
It’s Still Bad
Comparisons aside, no one is saying the current recession isn’t a painful one, and some see very little reason for optimism.
“I can't identify anything than looks good,” says Dean Baker, co-director of the Center for Economic Policy And Research, adding that business investment—which appeared to be holding up—posted its sharpest decline in 50 years in the final quarter of 2008.
“I'd be shocked if we have growth this year,” says Baker, even though he expects the Obama administration’s stimulus plan to have a sizable economic positive impact.
So may the words of the President and his advisors, say economists.
“It’s not surprising that politicians exaggerate this,” says Resler, who predicts “The tone of the message is going to start changing immediately; now that we have the stimulus in hand, you enhance it by saying positive things.”
Tunnel Thinking
For all the comparisons with other recessions, exaggerated or not, the most meaningful one may be its duration. It is also the toughest.
The consensus is this recession will end sometime between the second half of 2009 and the beginning of 2010. The pessimists say wait till next year—period.
David Jones, CEO of DMJ Advisors, is among those who see “hints of stability.” By that he means, the rate of decline in areas like retail appear to be slowing.
“We'll see the same thing happening on the housing side in the next couple months,” says Jones.
“I'm just waiting for the shift in people’s expectations,” adds Rupkey.
[I]