PrintJanuary 31, 2009
It's a Recession, Really
For those of us waiting for two consecutive quarters of shrinking real GDP before we declare a "real" recession, we can stop waiting. The preliminary estimate for the 4th quarter of 2008 showed a decline of 3.8% at an annual pace, after also declining in the 3rd quarter.
The media spin is to aid Democrats, which means that right now the spin is to make our present situation look like an unprecedented crisis (both to make Bush look bad and to provide cover for transferring lots of borrowed money to Democratic interest groups).
So I will try to provide the service of putting current numbers in perspective, with as little spin as possible.
First off, the "annual rate" of 3.8% shrinkage is what we'd get if that same one-quarter pace continued for four quarters. What actually happened was that GDP shrank 0.1% in the 3rd quarter and 1.0% in the 4th, for a combined loss of 1.1% over two quarters. Through all of 2008, the real GDP shrank just 0.2%, because the economy actually grew in the first half of the year.
So far in this recession (and it is now OK to call it a recession ), real GDP has shrunk 1.1% from its peak, and non-farm payrolls has shrunk 1.9% from its peak. How do these numbers compare to previous recessions?
The NBER has called 11 recessions since World War II, including this one.
- The maximum drop in real GDP for the previous 10 recessions, peak to trough, ranged from 0.4% to 3.8%, and averaged 1.9%. So far, it has dropped 1.1% in this recession.
- The duration of GDP shrinkage, peak to trough, ranged from one quarter to five quarters, and averaged 2.4 quarters. So far, our recession has two quarters of negative growth.
- The maximum drop in non-farm payrolls ranged from 1.3% to 5.2% (1949), and averaged 2.7%. So far, payrolls dropped 1.9% in this recession.
- The duration of payroll shrinkage has ranged from 4 to 30 months, and averaged 13. So far, payrolls have shrunk for 12 months in this recession.
- The peak unemployment rate ranged from 6.1% to 10.8%, and averaged 7.5%. The latest number for the current recession, December 2008, was 7.2%.
- Since World War II, we've averaged a recession about every 6 years, start to start.
There is good news and bad news in these numbers.
The good news is that our current recession is nowhere near unprecedented. In fact, it is better than the average recession in all measures above: real GDP, non-farm payrolls and unemployment rate. In fact, you could say it is a typical recession. It even started about six years after the last one.
The bad news is that this recession is probably not over. If this becomes an "average" post-WWII recession, our GDP will fall another 0.8%, in this quarter (1st of 2009) before it starts growing. And payrolls will shrink another 0.8% over the next month or so, before growing again. And unemployment will peak at 7.5%.
If this recession matches the worst of the previous 10, our GDP will shrink another 2.7% going into the fall. Payrolls will shrink another 3.3% for at least another year, and unemployment will peak at 10.8%.
So simply going by averages, this recession should end this year, maybe even in this quarter or the next. If things go bad, or no worse than in the last 60 years, we might not pull out of it until late this year, with lousy employment figures lagging into 2010.
By the way, none of the previous recessions was ended by the government spending a trillion dollars. Our current deficit is projected to be 7% of GDP or more. The deficit never exceeded 6% of GDP in any of the previous 10 recessions, or at any time since 1946.
Data Sources
- Unemployment data came from the Bureau of Labor Statistics: http://www.bls.gov/. Click on "historical tables" under unemployment rate.
- GDP and payroll data came from Bureau of Economic Analysis and the Bureau of Labor Statistics via the St. Louis Federal Reserve's Economic Data -- FRED: http://research.stlouisfed.org/fred2/, specifically Series GDPC96 and Series PAYEMS.
