Are We Done Yet?

DKW; August 12, 2009

That question comes out of the mouth of a rugby coaching colleague of mine each time we score. The reply from our fifteen on the field is always a resounding "NO!"

We have been asking ourselves as economists that same question about the current recession each time we get any significant data. Unfortunately for the last year, the answer has been the same as that that we hear from our lads on the pitch. Until now.

The current recession has lasted 20 months so far, December 2007 through June 2009. This is the longest recession since WWII. The average recession length since 1945 is 10 months. The previous recession lasted 8 months, from March 2001 to November 2001. The 1990-91 recession also lasted 8 months. The lengthiest to date were the recessions of November 1973 to March 1975, and July 1981 to November 1982, both were 16 months in duration.

I believe the recession is over or nearly over. I think we will see a positive quarter-to-quarter GDP growth number for the third quarter of 2009; a number that won't show up until October 29, 2009, and be preliminary at that. The recession may not be officially declared over until sometime yet thereafter when the NBER meets and deems it so.

This is not to say that the economy is in great shape or will approach economic activity levels seen in 2007 any time soon. For example, instead of selling 12.5 million domestic - made cars at a seasonally adjusted annual rate (SAAR), we are selling 8.5 million units SAAR. That leaves the domestic automakers and their workers still 50% below prerecession production levels. Same for housing - instead of selling 1.6 million new homes as we were in 2006, we are selling 0.6 million units SAAR - a million fewer new homes. (New home sales peaked at about 2.2 million units in 2005.) The change in both these major sectors has been brought about by more attractive incentives: the Car Allowance Rebate System (CARS) or "Cash for Clunkers" for autos, and lower prices and mortgage interest rates for homes. The credit squeeze is still affecting both sectors. Even used car sales deals are being abrogated because buyers are not meeting credit worthiness standards.

Consumer spending also remains weak (real Q2 consumer spending was negative) and is expected to remain so in the months ahead as unemployment remains high and consumer spending patterns adjust to the wealth destruction in their housing and financial securities investments. Declines in business investment, factory orders, capacity utilization, inventories, and exports have all essentially bottomed out, but none are yet showing signs of robust recovery.

So, if nothing is really heading higher with any pace, why would the economy turn around? Much of the expected increase in GDP growth in the next quarter is not based upon robust growth, but rather on a halt of rapid declines and some limited gains. In other words, we will see a little growth from low numbers. Think of it as the economy is getting to its knees after being knocked flat. It may be awhile before it is fully erect.

The recovery may well be led by Asian import demand for durable goods and services as their economies have turned the corner, in large part due to the economic stimulus package of the Chinese government. In non-purchasing-power-parity GDP terms, China's stimulus package was about four times that of the U.S. Exports to China from Japan, South Korea, Taiwan, Vietnam, and others are on the increase.

So what about jobs?

We are still in for higher unemployment rates and more job losses in the coming months. Remember that employment gains always lag economic gains. In recessions since WWII, the jobs lag has been anywhere from 9 to 19 months. After the 2001 recession ended, Wisconsin seasonally adjusted (SA) unemployment peaked 17 months later, with an additional 30,000 unemployed. Wisconsin's SA unemployment rate peaked at the same point, up a full percentage point, to 5.9%. So far during this economic downturn from December 2007 through June 2009, Wisconsin has lost 135,500 jobs, on a seasonally adjusted basis. The SA unemployment rate has doubled from 4.5% to 9.0% over the same period. It was 20 months after the last recession ended in November of 2001 that Wisconsin jobs hit bottom, in July 2003. Following the 2001 recession, it took 50 months (over 4 years) for Wisconsin job levels to reach the previous peak, SA.

Why the lags? The average U.S. work week is currently running at 33.1 hours. Businesses usually increase worker hours back to the full-time level and then add a little overtime before they hire new workers. Businesses have to be convinced demand has increased before they will make commitments to add new staff. How long the employment lag will be will be determined by the strength of the recovery.

The recover will probably be fairly lackluster due to: 1) the ramifications of consumer wealth destruction, 2) tight credit markets, and 3) the need to retrain many workers for new jobs. You might call this a "consumer-less" recovery, which probably means job recovery will be slow as well - they kind of go hand-in-hand.

So the next time we ask whether the recession is done yet, we hope to hear a reply we would never accept from the club side -Yes.

Wisconsin comparatives through June 2009

Written by Dennis Winters, Chief Economist and OEA Administrator. August, 2009.

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