Really Bad Numbers = ?

I’ve tried to lay off my econ-based threads so all those that celebrate national crass consumerism day could stay off the window ledges instead, enjoying the yuletide fireplace.  This year, I’m earning my title as dismal scientist and this post is not full of seasonal cheer.

hooverbuttonEmployment: The level of continuing first time unemployment claims stands at a 26-year high of 4.51 million.  The 1982 recession was the worst post WW2 recession to date.

2008 Yearly Market Performance: (11 year lows)

U.S. indexes
Dow Jones Industrial Average -35%
S&P 500 -39%
Nasdaq -42%
Dow Jones Financials -55%
Amex Oil Index -38%

Housing: House prices have fallen to their 2004 level. Sales of both existing houses and new construction are miserably low.  Resales were down 10.6%f this year.  Basically, we’re seeing the fastest decrease  in sales on record.

Consumer Confidence:

The Reuters/University of Michigan survey of consumers rose to 60.1, better than a preliminary reading of 59.1 released earlier this month and topping the 58.5 reading forecast by economists’ surveyed by MarketWatch.

It also marked a sharp improvement from November’s 55.3 reading, a 28-year low…

The index has tumbled 20% from last year and 38% from a peak reached in Jan. 2007

I think you get my drift and the downward drift of the economy.  When you teach economics, one of the concepts you rooseveltalways teach is what is a recession and how do you recognize it and define it?  You always contrast the data of all the post war recessions with the Great Depression.  The interesting thing is that we really don’t define what is a depression and how you recognize it and define it.  I think it’s because the assumption is that we’ve learned so much it will never get  ‘THAT’ bad again.

The NBER calls a recession based on a series of downturns in key economic indicators (some of which I’ve covered above) and two quarters of negative growth in GDP.  They called this current slump a recession last month and dated it back a year ago.   A bigger question looms,however.  Will we know when to call it a depression or will it get to that point if it doesn’t reach the depths of the great one?

The old joke used to be a recession is when you’re unemployed, a depression is when I lose my job.  But seriously, we have no real definition of depression.  Some people have suggested a decline of GDP that exceeds  10% or a recession that lasts more than 3 years.  The Great Depression lasted 43 months with  output falling by 13% between 1937 and 1938.

Here’s the latest from the BEA:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.5 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to final estimates released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 2.8 percent.

There’s some speculation that Real GDP has fallen around 6% this quarter.  We won’t know that for certain for a  few months, however.  Before the Great Depression, downturns were commonly called depressions and financial crises (bubble bursts)  were called panics.  The longest ‘depression’  in the US lasted 65 months from 1873-1879.   They actually switched to calling downturns recessions as a way of getting folks minds off the big one.    This is preventative so that every time we have a recession, folks having lived through the Great Depression wouldn’t panic and contribute to making things worse.

Here’s some thoughts from The Economist:

But a recent analysis by Saul Eslake, chief economist at ANZ bank, concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half. America’s worst recessions before the second world war were all associated with financial panics and falling prices: in both 1893-94 and 1907-08 real GDP declined by almost 10%; in 1919-21, it fell by 13%.

This description sounds eerily close to what’s been happening recently.  You may think that we’re splitting hairs here but there is actually something important in this distinction.  Under this definition, the traditional policy prescription for the ‘recession’ is to lower interest rates.  As you’ll note from the extremely low rates we have now, this doesn’t work in the ‘depression’ scenario.  Under the second scenario, monetary policy won’t work.  Strong fiscal policy is advised.

Again, we did learn a lot from the Great Depression, so I’m not all that worried we’ll make the same old mistakes we did then.  The Fed let hundreds of banks fail, shrunk the money supply, and the federal government suddenly got worried about a deficit and tried to raise taxes to close it.  Repeats of these mistakes are highly unlikely.  However, that doesn’t mean that we wont’ find new ones to make.  That is what really worries me.

The other ‘unknown’ out there you hear discussed is the size of the stimulus and the strength of the multiplier process.  This is something I’ve discussed here before.  The bigger naysayers point out that the cure of the Great Depression was probably WW2.   No one wants a repeat of that.  Additionally, as pointed out by Krugman in his NY Times piece this week, we now have all these states with balanced budget amendments.  I tried to stop this unsuccessfully in Nebraska in the early 90s.  It takes more than a minute sound bite to explain why you should pass a law that says government should be allowed to spend like crazy during a recession but should be forced to balance its budget and save during a good time when folks just want their taxes low.  Will the states and municipalities be able to fund their huge laundry list with federal deficit spending?  Only time and the new situation in Congress will tell.

Finally, so much of any stimulation is likely to be watered down because we buy so many things from other places.  When we buy imports, we export the economic growth that comes with import consumption.  We buy a lot more foreign goods than we did during the 1930s and 1940s so any major stimulus is likely to be partially exported to places like China, India, and the oil exporting countries.  No one is certain about the size of this effect.

Meanwhile, the national stats are still heading downward and do not appear to have reached a bottom.  There are opportunities for some unconventional policies.  Already, the Fed has started using its balance sheet (called quantitative easy) and is has interest rate policies at the Zero Bound.  Next month, the Fed will start buying mortgage securities to help the housing market and some of the credit markets stabilize.  The Fed is already being inventive.  Will we see the same bold moves next year under Obama and Democratic leadership?