"The Recession - How Does it Compare?"

Sydney M. Williams

Thought of the Day

“The Recession – How Does it Compare?”

July 26, 2010

While there is no debate that the recession we experienced has been a tough one and for those who have been unemployed for more than a year it can’t get much worse; nevertheless, the question arises – are things as bad as we are being told?

The irony of the situation is that both political parties appear to have an interest in promoting what is darkest: Republicans for the obvious reason that a dire economic outlook appeals to their playbook, and Democrats because they choose to argue they inherited the worst economic situation since the Great Depression – who wants to be seen wrestling a bobcat when a tiger is far more ferocious?

This unusual confluence of events has created a cloud over the landscape, causing a loss of confidence aided by a press grown increasingly opinionated; it hampers the recovery from the worst recession in a generation.

But is this period worse than the recessions of 1973-1975 or the double recessions in 1980-1982? In the post-World War II era, recessions occurred frequently and lasted, on average just under a year. From 1945 through 1991 there were nine recessions. According to data from the National Bureau of Economic Research, the average trough to trough period lasted 50 months with an average duration of 10.7 months. Something changed in the 1980s. The short recession of 1990-1991 occurred 92 months after the recession which ended in November 1982. We then experienced 120 months of growth before dipping into a recession which began in March of 2000. Eighty-one months would go by before the start of the recent recession, which began in December 2007.

During the 1970s, unemployment topped out at 8.7%, relatively benign compared to the present. On the other hand, year-over-year GDP dropped 6.8%, according to the San Jose State University Department of Economics, almost double the year-over-year decline of 3.8% in the current recession. Inflation during the 1973-1975 recession rose to 12.2%, placing the Misery Index substantially above where it now stands. During the 1981-1982 recession, unemployment peaked at 10.2%, similar to today, but then stayed above 10% for ten months.

A number of unique circumstances proceeded the current recession. For one, severe recessions appeared to have become obsolete. We were only in recession for 16 of the 300 month period between 1982 and 2007. Throughout the last thirty years, and especially during the past couple of decades, improvements in technology generated huge improvements in productivity, displacing millions of skilled and semi-skilled workers, requiring a new emphasis on education, which was not forthcoming as quickly as needed. Those improvements in productivity caused re-hiring to be slower than in previous recoveries. However, increased trade and a strong dollar during the last half of the 1980s and 1990s meant that consumers benefited from cheaper imports and masked some of the damage caused by drops in incomes for millions of workers. Ten years of economic growth – beginning in the last months of George Bush, Sr. and ending in the waning months of the Clinton administration – led consumers to become overconfident. Easier borrowing conditions, low interest rates and a desire to live as well as one’s neighbor caused consumers to become more vulnerable to an economic decline. The sparks that ignited the downturn were far-too-lose mortgage offerings and a focus by government in getting everybody into their own home. In retrospect, the collapse was inevitable.

When one steps back and takes a look, it is remarkable that the situation today is not far worse. Investors, which include half the population, lost $6 trillion between 2000 and 2002. Our country was attacked on September 11 2001 for the first time since Pearl Harbor. Consumer debt rose to unprecedented levels in the late 00s. We had a near-death experience in the fall of 2008, when the banking system came close to collapsing. Yet the recession seems to have lasted just four quarters.

There is little question in my mind that growth going forward will be slow. The consumer appears to be, sensibly, retrenching and since he represents two thirds of the economy, any absence on his part will have to be felt. The financial reform bill, while hopefully serving to avoid future catastrophes, will serve to limit and make more expensive credit, thereby limiting growth. The enormous entitlement programs passed by Congress will, at some point, have to be paid for. Both spending cuts and tax increases are inhibitors to growth. Technology continues to advance, improving productivity; yet Washington persists in discouraging competition in education by bowing to the will of teacher’s unions. Private competitors to Sallie Mae face tougher restrictions, at a time when education is needed more than ever, particularly the skills needed to advance in a more technological world. Ridiculous immigration laws discourage educated foreign students from becoming citizens, while doing too little to deter the illegal immigration of workers with little or no skills.

But, as I look at our plight, I am far from dismayed. Our economy is tremendously resilient. The people of this country are amazingly adaptable. The consumer is doing what he or she needs to do – retrenching. Corporations have amassed almost a trillion dollars in cash, most of which could be invested productively. It is the third leg – government – that gives pause. More than anything else it is the restoration of confidence and a belief in the future that is needed. A Gallup poll released last week indicated that the percentage of Americans who say they have “a great deal” or “quite a lot” of confidence in Congress is now at 11%, its lowest level ever. Businessmen and women, who do most of the hiring, need a clear understanding of the rules and regulations that govern their industries. Not helping matters is a government which appears intent on enlarging its bureaucracy and increasing control; it is not one that will likely unleash the forces of creativity and innovation.

The recent recession was a doozie, the worst in a generation, but at about 15 months in duration (the NBER has yet to finalize the duration of the recession) it seems comparable to the 1970s, with unemployment not as bad as during 1981-1982 recession. (In contrast the Great Depression experienced two recessions, one of 43 months – 1929-1933 – and the second of 13 months – 1937-1938. Unemployment reached 25% and stayed above 15% until the start of World War II.) The recession could re-emerge in a more virulent form, but at this time the signs are not there. The ECRI numbers released last week suggest a flattening in the very recent down cycle. And, as Jim Grant writes in the current issue of his news letter, “shipping executives fretting over a container shortage doesn’t seem like the thing of which depressions are made.”