Sunday, February 1, 2009

How bad is the recession, really? Part II

[See my earlier post on the same subject here.]

Two days ago, the Commerce Department reported that during the fourth quarter of 2008, real gross domestic product decreased at an annual rate of 3.8%. Bad news, to be sure, but in a sense, not so bad, since most economic forecasters had been expecting a more severe drop of 5% to 6%.

In virtually all news reports, however (like this one in The New York Times), the bad drove out whatever good there might be. That's not surprising. It has become almost a truism to say that the current economic crisis is "the worst since the Great Depression," even though that's demonstrably a ludicrous exaggeration (according to the National Bureau of Economic Research, during the 43-month depression of 1929-33, real GDP plunged 27%, making it about 10 times worse than the next worst post-war recession). Continued gloom and doom are the order of the day. It's as if no one wants to get out of step, even in the face of what might otherwise be reasonably reassuring news, lest one get tagged as a pollyannish naif.

Of course, the recession may get a lot worse, and many fear it will. It seems headed toward becoming the worst downturn since the back-to-back recessions of 1980-82 or as bad as the deeper (but relatively shorter) contraction of 1957. Then again, maybe it won't. A look at the actual data in hand so far gives support to both possibilities.

Before falling sharply in the fourth quarter of 2008, real GDP declined by a modest 0.5% percent in the third quarter. While the current recession officially started in December 2007, real GDP was still growing in the first half of 2008 and recorded an overall increase of 1.3% for the full year, compared with a 2.0% rise in 2007. So, 2008 was nothing to write home about, and it ended with a sharp drop and an unnerving financial crisis, but we have a long way to go before this recession can be called the "worst since World War II," another of the dark descriptions we see and hear daily.

In fact, the most pessimistic current forecasts for 2009 for the U.S. and other advanced economies is that we'll see them decline by 2% or so over the year. Most economists today believe the U.S. economy will experience another quarter or two of significant decline -- perhaps as much as 4-5% on an annualized basis, a return to slow growth in the second half of 2009, and a quickening of growth in 2010.

In its latest forecasts, for example, the International Monetary Fund expects the global economy to grow 0.5% this year and 3% next year (compared to 3.4% in 2008). It anticipates that the advanced economies of the world, in the aggregate, are likely to contract by 2% in 2009 and grow 1.1% in 2010. It expects the U.S. economy to perform pretty much in line with this, declining 1.6% in GDP in 2009 and then growing 1.6% in 2010. (The IMF believes that some other major economies will have a worse year than the U.S., with GDP declining 2.5% in Germany in 2009, 2.8% in the U.K., and 2.6% in Japan.)

Of course, these projections may be overly optimistic and the recession may be a whole lot deeper and longer (but as happened with the actual data for the fourth quarter of 2008, these projections may also turn out to be too pessimistic).

So let's assume for the moment that the recession is really a lot worse than the current forecasts would have it and that GDP winds up, say, 10% lower at the recessionary trough. To put that in perspective, it would mean that real GDP per capita in the U.S. and other advanced economies would be back to the level it was in.....the year....2000!

If you've lost your job and your health insurance or half the value of your 401-k or you're afraid of losing your house, you're in a terrible personal recession and not interested in data about GDP. And there is no question that this recession, accompanied as it has been by a nerve-wracking credit freeze, a confidence-numbing plunge in the stock markets, and unusually precipitous destruction of jobs, is a tough one, very possible the worst in 25 years or more. Still, the numbers are the numbers, and there are good reasons to believe that we'll see improvement before the end of this year.

What do you think? Post a comment.

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