Tuesday, February 10, 2009

How bad is the recession, really? Part III

(h/t for graph: Marginal Revolution via Donklephant) -- Click on image to enlarge

President Obama called Monday for quick action on the fiscal stimulus bill before Congress, saying that any further delay “could turn a crisis into a catastrophe."

Strong words, particularly since most Americans are already convinced that the recession is a tough one and that some action is needed. For months, we've heard a steady drumbeat of gloom and doom and countless references to the "worst crisis since the Great Depression" of the 1930s. So how bad is this recession, really?

In previous posts, I took a look at the actual performance of Gross Domestic Product (or national income), to date, compared to other recessions since World War II and at some projections of GDP for the near future. In both cases, it seemed to me that what the numbers show is a recession that most likely will be as long and deep as the double-dip recessions of 1980-82.

The graph shown above offers another way to view the recession and compare it to the 11 other post-war recessions. It tracks the total percentage decline in employment over time (not increasing unemployment) from the start of each recession as determined by the National Bureau of Economic Research (which is regarded as the official source for such data).

The heavy green line toward the center represents the current recession. Note that all the other lines except the green one reach a low point and then travel upwards again. The trough of each line reflects the bottoming out before economic growth kicks in again (although employment tends to lag behind actual growth in GDP).

The current recession has not yet bottomed out, although it is already into its 13th month. In almost all the other recessions, the trough had been passed before the 13th month -- some long before it. That means the current recession is already longer than most. But the decline in employment was not particularly steep until the past several months, coinciding with the sharp drop of GDP in the fourth quarter of 2008.

Now, enlarge the graph and look closely at the slope of the lines. Until a few months ago, the slope of the green line is fairly shallow, like those of the relatively mild recessions of 1969, 1990 and 2001. Then rather suddenly -- right where the September start of the financial crisis would be on the graph --the slope steepens. Since then, it very closely tracks the line for the 1981 downturn. (A reminder: we had a shorter, milder recession in 1980, and then a deeper, longer one that began in 1981, which are often viewed together as the "double dip" decline of a relatively long, severe recession of 1980-82.)

If the green line continued along that slope out to the 16th month and then bottomed out where the 1981 line hits its trough, we would indeed have seen the longest, deepest recession since 1982. That is pretty much the track that most analysts currently foresee -- without any stimulus bill such as the one now working its way through Congress. Forecasters expect the economy to continue to contract during the first half of 2009, resume slow growth in the second half, and then pick up speed gradually in 2010.

Of course, it may turn out to be a lot worse than that, and the green line may plunge further and keep going down for a good deal longer than another four months. Weighed against that possibility is the fact that there will be an $800-billion-plus stimulus program, on top of the other huge flows of new money being injected into the banking system by the Treasury and the Federal Reserve.

All in all, it's a good bet that the worst this year will be on a par with 1981-82. It will be a bad time -- certainly a severe personal trial for anyone who has lost a job, a house or a major investment -- but it's a long way from another Great Depression or an economic catastrophe.

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