Putting the Recession in Perspective

"There is nothing typical about a typical recession. They're all unique," said Bill Strauss, senior economist and economic advisor for the Federal Reserve Bank of Chicago.

Strauss pointed out that people often think the definition of a recession is two consecutive quarters of negative GDP growth. "That's absolutely not true," he said. For instance, during the recession in 2001, we had three negative quarters, but none of them were consecutive. And in our current recession, during the first two quarters of the recession, GDP actually went up, significantly in the second quarter.

To put this recession into perspective, Strauss said, since the 1960s, the average duration of a recession has been about 11 months, with a range of six to 16 months. If this recession turns around midyear, as is being predicted, we're looking at around 18 months.

A "blue chip panel" of 50 top forecasting economists surveyed recently are predicting unemployment to top out at around 8.8 percent, Strauss said. That's above the average 7.8 percent of the recessions we've seen since the '60s, but well below the historical peak of more than 10 percent in the early '80s. On the other hand, he said, job losses through January were at about 2.6 percent, near the top of the typical range for a recession. "My guess is we'll be looking at a 3 percent to 4 percent job loss" by the time it's over, he said.

"So it's going to be a tough year for 2009," he said. "We're looking at a minus 1.9 percent growth rate, following -0.2 for 2008." This is the weakest growth we've seen "in many, many decades," he said.

2010 growth, however, is expected to grow at around 2.9 percent, slightly above trend.

"So the view of these economists is that we are in a business cycle. It's going to be deep and it's going to be long."

The credit crisis is key to the recovery. Credit, Strauss explained, "is the oil in the engine of our economy, and it has drained out quite significantly, so our engine is not running very well."

There are some bright spots, Strauss said:

• The housing crisis, which led into this recession, is much closer to the bottom than to the top, after three years of deep losses. Some analysts, he says, are expecting to see a turnaround this year. "This is an industry that is really trying very hard to balance themselves, to get their production in line" with demand, he said. Housing starts have fallen from more than 2 million to about 600,000. Last year was the lowest level for housing starts wince the government started collecting this data in 1959. And mortgage rates, down to about 5 percent, are extremely low from a historical standpoint. Home prices have fallen in many areas of the country, especially those states where they had risen too high during the boom - California, Nevada, Arizona, Florida. "Because of the mortgage rates coming lower, because of prices moving lower, affordability today is better tha it has been in a decade," Strauss said. Unfortunately, getting a mortgage has become more difficult - although credit standards have begun to ease just a bit.

• Lower energy prices are putting more money into consumers' pockets for discretionary spending. For every 1 penny reduction in the price of gasoline, that's another $1 billion available for consumer spending.

• The Fed has implemented very aggressive monetary policies to help turn things around. Fewer fears about inflation have allowed the Fed to be more aggressive.

• The fiscal stimulus package passed last year and the economic stimulus legislation recently signed into law will do their part to turn the economy around.

• Productivity growth remains solid. "This is how we directly contribute to improving standards of living," Strauss said. "We certainly want to employ people, but in terms of growing your GDP just by adding more workers to the economy, that makes your GDP larger but doesn't make individual share of GDP any larger."

• Industrial production fell off sharply in the second half of 2008. In fact, he said, the manufacturing sector reacted so quickly to the downturn that was triggered by the financial crisis in September, they actually cut more than was needed. But in a way, that's a good thing. "We have probably seen the worst in the rate of [industrial production] growth declines, which occurred in the fourth quarter," Strauss explained. "Inventories, all in all, are in pretty good shape, so when the economy does turn, we'll be able to see a much quicker production response."

Strauss also cautioned against comparing this recession to the Great Depression of the 1930s. During the Depression, he pointed out, GDP fell by 26 percent - the worst we've seen in the last 40 to 50 years, he says, has been a fall of about 3 percent. Unemployment rates during the Depression were 25 percent. The worst we've seen since was 10 percent. During the Depression, all the bank failures caused the money supply to collapse. Today, there are safety nets such as the FDIC. "We're clearly in a whole different league," he said.

In addition, the government is responding far differently. "There were a lot of mistakes made during the Depression," he said. "Many policy actions messed things up." For instance, back then federal officials demanded a balanced budget, so the federal government reduced its spending when the economy started going downhill, creating a downward spiral. A "protect America" policy in the '30s raised tariffs up to 30 percent, creating a disastrous drop in global trade. The government will not repeat those types of mistakes.

"We have led the world into this economic downturn. And it's my expectation that we will lead the world out of the current economic downturn.

"Since World War II, we have grown far often more than we have gone down," Strauss said. In fact, he said, since World War II, 86 percent of the months have been growth months. "People like to do business, we like to do better, and that's the driving force that has economies moving higher rather than lower."

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