Everyone wants to know when the economy will turn around. The answer is June 17th. Ok, obviously I can't be nearly that precise, but I expect that sometime next Summer the recession will end and growth will resume. As compared to the conventional wisdom, I am actually being quite optimistic.
Previous recessions since WWII lasted 8, 8, 16, 6, 16, 11, 10, 8, 10, 11, and 8 months (measured from the time of the peak of the economic cycle through the trough, the top through the bottom).
This works out to an average of 10.1 months per recession. That is, the average recession since World War II lasted for 10.1 months.
According to the pertinent body, the Business Cycle Dating Committee of the National Bureau of Economic Research, this recession began in December 2007. The main reason for this determination is that the economy lost jobs each month this year (even before the financial crisis really got going). So if this recession lasts for an average amount of time, it would be over by now, or would end any day now.
This recession, however, is clearly destined to be much worse than an average recession. There's just no doubt about that. So in considering how long it will last, I'm simply throwing out the shallow recessions and considering only the severe recessions.
The two most severe recessions since World War II, working backwards, were the 16 month recession that ended November 1982 (SKY HIGH interest rates, Rust Belt, Reagan deeply unpopular), and the 16 month recession from November 1973 to March 1975 (Inflation, high oil prices, Watergate, just not a real good time to be us).The shorter recessions, like the one from March 2001 through November 2001, encompassing and exacerbated by 9-11 and the one following Saddam's invasion of Kuwait in 1990, were relatively shallow. I think its a metaphysical certainty that this one will be vastly worse than the most recent two shallow recessions, because of the various aspects of the financial crisis, and the huge credit crunch which has resulted.
So this is a severe recession (I hope, the alternative is much more likely to be a second great depression than a shallow recession). Since the last two bad recessions lasted 16 months, it seems reasonable to begin my analysis by assuming that this one will last about 16 months, give or take. There are, as always, things which make this time different. More on that below.
Based on the determination by the powers that be, mentioned above, that the current recession began in January 2008, if this recession is like the last two severe recessions, this recession could well end sometime around or shortly after May of this year, which would be 16 months after the recession began.
That's the (relatively) good news.The bad news is that this scenario is in many ways much too optimistic. Although the economy was in recession earlier in 2008, it was just barely so. Job losses were fairly small until about September of this year. Major business restructuring did not begin until about September. The tax rebates helped mitigate the recession earlier on, thus delaying the onset of business job slashing. So the adjustments that are usually made even fairly early on in a recession were not made.
But fear not. In November, the economy lost the huge number of 533,000 jobs, following a loss of 403,000 in September and 320,000 in October. Now that's job loss. Everyone expects a loss of 500,000 to 600,000 jobs in December. (These numbers are seasonally adjusted, meaning that you consider what has happened in Decembers past, which usually have an increase in jobs for the holiday season).
In any event, if you assume 500,000 jobs lost in December, that would make 1.7 million from October through December, a huge number, and likely a reasonable percentage of the total number of jobs which will end up being lost in this recession.
It took a while, but everyone has finally realized that we are in a deep recession. This much is a very good thing, as it enables businesses like auto companies, Investment Banks, and others in trouble to realize that they are and begin necessary downsizing. We are, I hope, a decent chunk of the way through that process. But more remains, not least the possibility of a chaotic Chapter 11 bankruptcy filing for GM and Chrysler, which would be so significant as to possibly throw off my timetable. We will see in the coming days and weeks if the Bush Treasury department intervenes to save them pending the new congress and administration. My guess is that they will, but you never know.
Of course I have already gone too long in this post without mentioning the credit crunch. Recessions often come complete with banking/financial crises. The S&L problems began in the early 1980s recession, and lingered almost into the early 90s recession, which had banking troubles all its own. The Great Depression, obviously, had hugely severe banking troubles. And this time around, banks are just not doing much lending about now. This is real bad, and will prevent economic recovery until banks begin lending more normally.
Business and credit conditions are probably both worse now than at any time since World War II. That's really bad and really, really scary. And it does portend a significantly longer recession than average. When you couple that with the fact that this recession started off very mildly, and only became severe about September 15th, when Lehman collapsed, you would conclude that the economy will contract all of next year. (Which it might).
There is, however, a significant upside in all of this gloom and doom. that is the completely unprecedented effort by the Federal Government to mitigate the effects of the recession. Fiscal stimulus has been incredibly lame thus far, with the rebate checks being most of it. But on the monetary policy side, the federal reserve has been extremely aggressive, cutting interest rates far and fast, injecting huge amounts of money into the financial system, buying commercial paper from businesses (essentially loaning many billions of dollars to private business), creating a Term Asset-Backed Securities Loan facility to support the issuance of asset-backed securities collateralized by student loans, auto loans and credit card loans, and much more.
Similarly, the Treasury Department has been hyperactive, as everyone knows, with the huge $700 billion appropriated for financial rescues and myriad other uses. Paulson has spent darn near $350 billion of that money and has asked Congress for permission to begin tapping the remaining $350 billion. GM and Chrysler may be the next beneficiaries of Treasury Department largess.
Although the Treasury's actions aren't classic economic stimulus per se, they will have much the same effect eventually, as they represent pumping huge amounts of government money into the financial system which will, I predict, enable a thaw in the credit freeze beginning relatively soon.
In essence, the economy is in a tug of war between the worst conditions since World War II on the one hand and by far the most vigorous government response on the other.
There is actually additional stimulus to the economy already in place. This includes: (1) the huge drop in oil prices, from a high of $150 or so to the current $45 or so. That's significant if the oil price roughly holds going forward. I would be very surprised if oil shot back up past say $70 or so in the next year, very surprised. (If I had to predict I would predict it stays fairly close to where it is now) So if oil holds nearish to the $45 level, that would amount to an approximately $300 billion per year tax cut as against the much more expensive oil earlier this year; (2) the new money which will be put in homeowners' pockets as a result of the coming refinancing boom. Interest rates have plummeted on mortgages. Even given the housing market's moribund state, and the credit crunch, many homeowners will successfully refinance.
Finally, and most significantly, Team Obama has been talking an awful lot about a very substantial fiscal stimulus which he has said he wants on his desk within the first week that he takes office! The new Congress is sworn in and starts work on January 6th. Given that Obama has a decent chunk of his team in place already, it is likely that this will be the new congress' first significant item, and conceivably Obama could have the new piece of legislation waiting for him on his desk following his inauguration speech.
There has been much speculation on the size of the upcoming stimulus package, which will be crucial in determining how much power it has to shorten/end the recession and, more importantly, to strengthen what could easily be a lackluster recovery. Obama has said that he intends the "single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s." These are encouraging words indeed with regard to the size of the upcoming stimulus package (which, I note, I have called for for many, many months!)
Speculation has been that this package would be $500-$600 billion for two years, an amount I would have considered too large 9 months ago, but I now consider somewhat too small. Still, assuming they close the deal at $500 billion over two years, that would definitely help. The GDP is now about $14.5 trillion. $250 billion per year is just under 2% of GDP. Not enough to turn an economy shrinking at 5% per year (as it is right now) into growth, but enough to give a good shove in the right direction.
Also remember that it will take time to get the spending going. The spending probably won't be at full force for about 9 months. So at the beginning of 2009 it will have little impact, but at the end of 2009 its impact will probably be more than 2% of GDP, and in 2010 will almost certainly be. So this stimulus package will really do some good by the middle-end of next year.
We have a bad housing bubble, which is another complicating factor. Traditionally, housing is a key factor in leading the country out of a recession, because lower interest rates make housing more affordable. That obviously won't work this time, not anytime soon, because there is a huge oversupply of housing relative to the demand which exists absent a belief that housing prices can only go up. So even with current mortgage rates near 45 year lows I don't expect housing to rebound anytime soon.
In conclusion, the current terrible conditions coupled with the extreme mildness of the recession in the first 6-8 months, the credit crunch, and the housing market's truly parlous state call for a long deep recession. The huge amount of governmental corrective action already taken, coupled with the Obama stimulus to come, call for a shorter, but still deep recession. I predict that these forces roughly cancel each other out, and we have a deep recession, but that it ends more quickly than the experts predict, sometime about June 2009.Taking a truly wild guess, I'd guess that 4th quarter GDP declines about 5.5%, First quarter 2009, ending March 31, 2009, declines about 3%, 2nd quarter 2009, ending June 30, 2009, declines about 3%, and 3rd quarter 2009, ending September 30, 2009, grows about 2%.
Sadly, if the recession is as short as I predict, I do think the recovery will be tepid, rather than the strong rebounds the economy used to have long ago, when factory workers were rehired when orders increased. This time around, companies will be very slow to take on new workers. Wall Street will not be growing anytime soon. Manufacturing could continue to shed workers, it wouldn't surprise me. So I predict a slow and halting recovery, which will feel much like a recession to many workers. Which is why I think the planned Obama Stimulus is significantly too small. A much larger stimulus would take out insurance against a flaccid recovery.
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