So I’m still wrestling with the disconnect between the economy I see on the street here in Torrance – which is strained, but not broken – and the level of hysteria I see in the media (including the blogs) about our current economic turmoil. Note that I’m unemployed as I write this, yet pretty comfortably optimistic.
This isn’t about current politics (yet). I’m in favor of the steps that Bush took and that Obama seems to be taking (with some pretty serious concern about the ‘quality’ of the spend in the stimulus package). But before I get there, I am trying to orient myself.
So here’s some data, and I’d love to trigger some discussion and insight from the crowd. Basic question: is panic really the right reaction?
Here’s a table of the incidences of negative chained GDP since WWII (from NBER). When there were multiple quarters with negative GDP growth, I summed them so that the ‘incident’ had a total percent change summing all the adjacent negative quarters. Note that some of these are single-quarter, and so not officially ‘recessions’.
| 1 | 1947 (Q2-Q3) | -0.16% | |
| 2 | 1949 (Q1-Q2) | -1.79% | |
| 3 | 1949 (Q4) | -1.02% | |
| 4 | 1953 (Q3)-1954(Q1) | -2.68% | |
| 5 | 1956 (Q1) | -0.47% | |
| 6 | 1956 (Q3) | -0.12% | |
| 7 | 1957 (Q2) | -0.25% | |
| 8 | 1957 (Q4) – 1958 (Q1) | -3.77% | |
| 9 | 1959 (Q3) | -0.08% | |
| 10 | 1960 (Q2) | -0.50% | |
| 11 | 1960 (Q4) | -1.30% | |
| 12 | 1969 (Q4) – 1970 (Q1) | -0.64% | |
| 13 | 1970 (Q4) | -1.07% | |
| 14 | 1973 (Q3) | -0.53% | |
| 15 | 1974 (Q1) | -0.87% | |
| 16 | 1974 (Q3) – 1975 (Q1) | -2.56% | |
| 17 | 1977 (Q4) | -0.01% | |
| 18 | 1980 (Q2 – Q3) | -2.18% | |
| 19 | 1981 (Q2) | -0.78% | |
| 20 | 1981 (Q4) – 1982 (Q1) | -2.89% | |
| 21 | 1982 (Q3) | -0.38% | |
| 22 | 1990 (Q4) – 1991 (Q1) | -1.27% | |
| 23 | 2000 (Q3) | -0.11% | |
| 24 | 2001 (Q1) | -0.12% | |
| 25 | 2001 (Q3) | -0.35% | |
| 26 | 2007 (Q4) | -0.04% | |
| 27 | 2008 (Q3 – Q4) | -1.09% |
Note that the current downturn (although not yet done) ranks 9th of 27 incidents…here is the table sorted by the percentage depth of the decline:
| 1 | 1957 (Q4) – 1958 (Q1) |
-3.77% | |
| 2 | 1981 (Q4) – 1982 (Q1) | -2.89% | |
| 3 | 1953 (Q3)-1954(Q1) | -2.68% | |
| 4 | 1974 (Q3) – 1975 (Q1) | -2.56% | |
| 5 | 1980 (Q2 – Q3) | -2.18% | |
| 6 | 1949 (Q1-Q2) | -1.79% | |
| 7 | 1960 (Q4) | -1.30% | |
| 8 | 1990 (Q4) – 1991 (Q1) | -1.27% | |
| 9 | 2008 (Q3 – Q4) | -1.09% | |
| 10 | 1970 (Q4) | -1.07% | |
| 11 | 1949 (Q4) | -1.02% | |
| 12 | 1974 (Q1) | -0.87% | |
| 13 | 1981 (Q2) | -0.78% | |
| 14 | 1969 (Q4) – 1970 (Q1) | -0.64% | |
| 15 | 1973 (Q3) | -0.53% | |
| 16 | 1960 (Q2) | -0.50% | |
| 17 | 1956 (Q1) | -0.47% | |
| 18 | 1982 (Q3) | -0.38% | |
| 19 | 2001 (Q3) | -0.35% | |
| 20 | 1957 (Q2) | -0.25% | |
| 21 | 1947 (Q2-Q3) | -0.16% | |
| 22 | 2001 (Q1) | -0.12% | |
| 23 | 1956 (Q3) | -0.12% | |
| 24 | 2000 (Q3) | -0.11% | |
| 25 | 1959 (Q3) | -0.08% | |
| 26 | 2007 (Q4) | -0.04% | |
| 27 | 1977 (Q4) | -0.01% | |
And that it will have to be twice as bad as it is to be as bad as 1980, and if is three times as bad, it won’t be as bad as 1957, which I don’t recall reading about as the nadir of the American economy.
My knee-jerk reaction is that there’s a lot to be concerned about, but that the economy has a lot of deteriorating to do before it becomes devastated.
Like I always say “things are never as good as you’re told they are, nor as bad…”
It’s worse then ever for the bankers, as well as the journalists — so the media has an incentive to sensationalize it. Plus the Great Depression had many bank failures, so there is a lot more fear of bank failures than of house construction company failures.
Finally, the 2008 tax rebates helped cause positive growth in Q2, even tho recently the recession was declared officially started at the end of 2007.
Related to this, a Tax Holiday now would probably be the best policy.
I think there’s a great deal of fear what the next quarter’s numbers will show. You have auto sales down 40 percent year-over-year, or to look in the small, there are a record number of empty storefronts in my neighborhood. Craigslist/SF Help Wanted for software guys is down from maybe 50-100 ads a day to 5. Economists are also more concerned because the first line of defense, lowering interest rates, has been tried and has not sufficed—pushing on a limp noodle, as the saying goes.
Lots of people are getting a tax holiday, GOP-style, by losing their jobs or going bankrupt.
[Thank you for Preview!]
I think it’s a lot of things, to be honest.
I think there’s some truth to the notion that, since the traditional media are facing a slow motion apocalypse, they project their own fears onto the economy at large.
I think the United States is always a little manic-depressive about the economy. Do you ever remember seeing a headline, or having a conversation about, being in a normal economy? No, it’s always either solid growth, sizzling growth, or malaise or recession.
And finally, just look at the timing– it’s been 29 years since we’ve had an economy this bad. People under about thirty five years of age just have no idea what’s going to happen next, because they have no experience of it at all. I’ve seen that play out among my acquaintances and friends– those my age and older are… not complacent, so much as girded because we’ve seen this before, and remember our parents going through it. (Or went through it ourselves.) Those more than a few years younger than me are notably more shocked, because their childhood memories don’t really include the crud of the late 70s and early 80s.
As has been pointed out, younger folks don’t remember the late 70s/early 80s, and only think in terms of the dot-com bust. The significant difference between now and then is that now we have banks holding paper (assets) they can’t move, while back then a flush economy had poured a lot of money down ratholes.
In poker terms, the dot-com players were betting winnings; the folks on the short end today were betting big parts of their bankrolls (some were betting the whole shebang plus a lot) and lost.
Structurally, that sounds a lot more like a Great Depression scenario than a simple bubble, but maybe I’m just pessimistic.
My suspicion is that part of what’s happening is simple fear. People around me aren’t buying anything beyond bare essentials, and are doing a lot of brown-bagging and less going out for lunch. Oddly, the SV startup I’m in will have no problem with our next funding round as our business – online fraud detection – is a strong counter-cyclical play.
OTOH, my wife, who sells small businesses, is actually quite busy, although her buyers are all low-balling.
In real-estate, my local area of Mountain View is actually holding up relatively well, but just a few miles away in San Jose, it’s pure foreclosureville. Oddly, our RE agent and loan broker friends are busier than they’ve been for a couple of years moving REOs.
In politics, the danger is that people know fully well that any stimulus has to be paid for as it will be completely “financed” by debt – and that as soon as we’re out of the recession, Obama will raise taxes hard. Why would anyone want to start a business in such a climate?
So, people figure they should save like mad to deal with today’s rainy day and the typhoon everyone’s expecting.
Marc, I agree with you. In the Midwest, we really aren’t feeling it at the most basic levels. Do I know people who’ve been laid off? Yeah, about 50. Most of them are bankers, Boeing management, and steel and automotive workers. But they’re doing okay, and a number of them already have new jobs.
The parking lots at the malls and at the movie theaters are packed.
This economic downtown disproportionately hit New York, but hasn’t hit us as bad. The Midwest really tanked in the late 70s and 80s. We never saw the 90s boom-times experienced on the coasts. We also weren’t hit very hard by the real estate bubble.
The biggest scare here was when the commercial banks looked like they would tank. After that ended, we haven’t seen the same levels of fear. Businesses are skittish, but many admit to me that they are doing normal sales for the month of January. Some are even doing better than last year.
Panic is never appropriate.
That said, comparisons to any post WWII recession are probably out, at this point.
This is a sea change. This is deleveraging. The amount of wealth destruction entailed by unwinding decades worth of debt is very large. This wealth destruction will have material consequences.
Reversion to historical mean levels of debt and mean levels of asset values is currently underway. Once begun, it never stops – the only question is how much undershoot of fair valuation there will be.
This will not end swiftly or easily.
I’ve been reading economist alot, they’re pretty grim at the moment. I would take a grain of salt from the media though… the 24 hours networks overreact to everything. I read somewhere that since reporters fly often, they overly worry about plane crashes. … if reportedly are worried about their jobs, they’re going to be overly worked about the market. Still, I think you can never know how bad (or how good) the market is until it hits its zenith.
As I noted before, my friend sells is a real-estate in his parents branch. He is given foreclosed properties from the bank to advertise. He just gets busier & busier & busier… He’s currently trying to borrow a second agent from another branch to take over the responsibilities he can no longer cover. Most of these are ocean front properties. Whole buildings of condos are being foreclosed on.
Since I’m entrenched in the academic world, it’s difficult to see if panic is “necessary”, but it’s happening. Endowments are down, so private schools are teaching overloads for no extra pay. Lots of talk about early retirements. Some community colleges are cutting back hours to make ends meet (our school is overloaded with students, so no cuts so far). We have ended all non-essential expenditures (trips/hires/raises) and are threatening to close underused programs.
One issue is that there are some that believe the recession began September 2008. If that’s true, we don’t have a lot of data yet to compare with other downturns and we probably have more losses in the coming quarters and a longer time frame to wait for recovery.
Another issue is that the weakness is broad and spread by a crisis in financing that hurts companies not at all involved in problem areas of the economy. The only sector unaffected is government and there’s that unfunded pension issue waiting to explode.
But the big question is the nature of the recovery. Will it be V-shaped or L-shaped? Businesses reported record-making profits and lay-offs appear to believe the latter.
Virtually everyone you hear has some sort of stake in making things look bad. And that often stems from this attitude that it is fait acompli that the government should be showering money on any problem. We’ve come a long way from the Reagan Revolution.
There has never been a better time to figure out just what the hell our government is (and has been) up to. The only solution they can even _imagine_ is essentially pork. They don’t call it pork anymore, now its stimulus.
And republicans are completely out to lunch. I’ll gaze into my crystal ball and see enough republicans getting led up to the trough to pass some version of this bill. They will claim its 1/3rd tax cuts (or whatever) but we will come to find out that is a farce. The tax cuts are only the first step- step two will be to jack up the top marginal rates, so this entire scheme is just a rewriting of the tax code to soak the rich. Conservatives are going to look back at this time period in disbelief that they walked this plank.
If we really wanted to help the economy we would slash corporate taxes (highest in the industrialized world) and suspend the capital gains tax for a few years. THAT would be stimulus.
But thank god we’ve got the finest minds in America working on this bill that will spend more money than than all the goods and services produced in South Korea in a year.
“Pelosi”:http://www.youtube.com/watch?v=x8hMJVXt09E ‘500 MILLION AMERICANS LOSE JOBS EVERY MONTH’
The dot-com crash was like a tornado – it was quick, most of the destruction was localized and it didn’t cause major, widespread damage.
This downturn is more like a tsunami. Right now, we’re standing on the beach wondering where the water went and why the fish are flopping around in the sand. Panic is never the right reaction, but it would be wise to seek high ground.
Right now, the high ground isn’t in Washington or on Wall street, but it is in Silicon valley and other tech outposts. Green technologies and alternate fuels are looking hopeful. Small businesses, new manufacturing techniques, medical care and tech are all expanding, not contracting. If people are going to spend money, they’re going to want to buy things that will improve their lives.
The problem for Silicon Valley is Sarbox. It’s pretty much impossible to build a decent startup nowadays without a plan to get bought. That means, greentech startups have to hope to be bought by GE, while everyone else puts their hope on Google, Microsoft, or Oracle.
The idea of building a standalone startup from scratch that becomes a world changer is basically dead as long as Sarbox remains in play.
Incidentally, this is an example of how misguided regulation benefits the powerful and weakens the “little guy’s” ability to become powerful someday.
bq. _high ground isn’t in Washington or on Wall street, but it is in Silicon valley and other tech outposts. Green technologies and alternate fuels are looking hopeful. Small businesses, new manufacturing techniques, medical care and tech are all expanding, not contracting._
Other than medical care, whose largest consumer prints its own money, I see all of these contracting. Biofuels in particular have been hard hit by the slump in gas prices. The tech industry is pleasing the markets with lay-offs. Small business? I guess it depends on the sector, but small business loans are increasingly in default and banks are more miserly with small business loans. The rate of small business failure is relatively high during good times.
As far as my wife can tell, the most popular small businesses right now are ones that deal in cash. She has two coin laundry listings now and about a hundred potential buyers. Bigger businesses that have more IRS visibility are not popular, even though one can buy them at very low ROE multiples at the moment.
Small business growth will lead the way out of recession, but if we do onerous taxes, regulations, and miscellaneous big-government feel-goodery, it won’t happen. F500 level big business hasn’t added a net job to the economy since the 1960s, and the government can’t collect taxes if there’s no private sector economic activity, so it’s growth is very finite.
Apparently the new pro-stimulus talking point is that this bill is too important to scrutinize. Its certainly too long to read.
I think my favorite provision has to be the 87 million for a new polar ice breaker. From the same Democrats assuring us the Arctic icecap is disappearing and all the polar bears are drowning. Wrap your noodle around that one.
I run a small business and we’ve been hurt some, unfortunately had to lay some people off. But the truth is (and i think this applies to the majority of the economy), things have been good for so long there honestly has been a lot of belt tightening possible without really threatening the core of the business. In other words, people are getting a lot leaner, which is a good thing. Obviously in the short term it sucks that people lose their jobs, but in the long term more competitive and profitable companies will create more, better paying jobs and create more wealth. There is a business cycle for a reason. Without winter we wouldn’t have spring time.
I’d initially meant to add the stat that 80% of all small businesses fail within 4 years, but on googling I found the stat to be disputed. It’s high though. Higher than say General Motors because nobody is going to bail out Ma and Pa’s motel.
I think a lot of people assume that businesses have a vault of cash in the basement that they draw on in short times. For a lot of reasons they don’t (investors like to see their money working; taxing bodies like to see the money spent). In a down turn they look to the bank or start unloading things, like people. Small business owners may face the choice of going to the bank and securing a short-term loan with family assets. Or they may just chuck it.
I’d like to read more about small business and the recession, because I think they might lead us out of the depression, but I’m not sure what, if any, policies would assist. Are small businesses really going to hire more people with a payroll tax holiday? I doubt it.
I don’t want to get into the pure politics of this, but there is a definite political aspect to the recession.
I don’t think most people have confidence in the government’s ability to address it. I find that very interesting given a huge wave of support for the largely statist party in the last election. Just as a matter of personal anecdotes, I’ve been surprised by the number of people I would consider left-of-center Democratic Obama supporters that ridicule the stimulus package. Not that they would have felt differently about any Republican.
And confidence is a big part of this.
Where is the wealth for the “stimulus” coming from? I don’t see that question being asked in the main stream media. Right now the “stimulus” appears to be coming from the printing presses. The inevitable effect of the government printing money will be inflation. Inflation is a tax that everybody pays (including China and the Saudi). Inflation is a way for the government to transfer wealth from the people to itself.
Here is my prediction and I hope it is wrong. The economy will tank further as inflation causes a decrease in everybody’s buying power. The government will likely resort to the print money and pass it out “stimulus” logic at least one more time. Rising prices due to inflation with wages lagging will get the populist in an uproar calling for price controls. The government will, of course, be happy to oblige. Shortages will develop for everything the government attaches price controls to as the economy sinks further. Throw in the impending SS liability and you have a recipe for disaster.
By the time we get to this point I think everybody will realize we are in a full fledged depression. Power will have accumulated in Washington with every new regulation that was designed to revive the economy. At this point calling ourselves a free people will be debatable. To which I think the nays will hold the advantage. Bottom line, I think were screwed.
A.L., if you’re interested in data on the depth of this downturn compared to the past, check out this post on Brad Setser’s blog. In fact check out everything on Brad’s blog.
Me, Wednesday: _”‘ll gaze into my crystal ball and see enough republicans getting led up to the trough to pass some version of this bill.”
“Politico,”:http://www.politico.com/news/stories/0209/18461.html today: _”Cuts between $90 billion and $108 billion have been discussed, but the negotiations have become more difficult as individuals have sought to not just scale back spending but also redirect money with the package. Collins herself favors some formulation that adds more money for infrastructure spending, such as clean water and transportation projects.”_
See- the problem isn’t that the trillion dollar bill is too large, its that the pork hasn’t been distributed fairly. Wheels need to be greased.
And why is Susan Collins still in the Republican caucus? Honestly, why not just hand over the seat to the Dem’s officially so we they don’t get to use her as a bi-partisan fig-leaf?
mary, thanks again for your ideas. You’d have to confess though, that your ideas, whatever their merit (and I believe the merit is considerable), are ideas on what to do with risk capital.
When I talk about the high ground, I’m interested in capital preservation. The conundrum now is that “safety” is itself a matter of dispute and a matter of risk taking
Oops – I’m the last person you should talk to about preserving capital. Financially, I tend to jump from one risky thing to another. My husband and I lost millions in the dot com crash. However, we did manage to save our kids’ college funds by putting them in bonds. Bonds and treasury notes may be safe..? Since I get sleepy when people talk about bonds and treasury notes, I rely on my husband or a financial manager’s advice for those.
After the dot-com bust, real estate looked like a reasonable investment, and it was. But when people started talking about ‘flipping’ houses, I remembered that the dot com bust came soon after people boasted about ‘flipping’ companies, so I got out of that. I also didn’t invest in any derivative-based funds, because I totally didn’t understand them. So maybe my judgment isn’t all bad..
Just speaking in general terms, it seems that the long-term solutions to our current problems won’t be coming from the financial sector or from the government. They’ll come from small/growing business and technology.
This chart on job loss gives a sense of why economists find this downturn so alarming.
BTW, the 1957/58 recession was one of the reasons the Edsel failed, and fatally injured DeSoto, Packard, etc.
Andrew, that chart is interesting though not a good explanation of why economists are alarmed. Sure, the last few months look alarming but it shows the job losses in September and October to be the same as any other recent recession. Yet that’s when all these economists started to predict the end of days.
I am sure they are concerned now, but I can’t help but wonder what the current economic climate would have been without the 24/7 gloom and doom over the last 5 months.
Donovan (I cannot get that ‘anonymous’ to show my name instead)
Well, Donovan, I don’t think the doom-and-gloom economists were responsible for auto sales dropping pretty much in half. The financial problems from the massive deleveraging of worthless assets picked up speed. The economists were mostly neutral observers.
I think we can file this under the Phil Gramm (“whiners“) folder.
The reliable (and reliably partisan) Andrew J believes that there was a transmission mechanism from “massive deleveraging” to auto sales which did not involve the media or economists. In this instance I think he’s right, but the issue bears some examination.
My recollection of the events of October is that economists were issuing dire warnings. See, e.g., Nouriel Roubini. Media and economists were doing their best to sound the alarm; Roubini and Stiglitz and Krugman et al were hardly “neutral” and in fact doing their best to inject themselves in the loop.
The better question is to ask _why_ the economists and the media became so shrill, and if these reasons were valid. I believe they were.
The fact is that key credit metrics (LIBOR, TED spread, etc) went nuts in the wake of the Lehman collapse. These metrics were reflecting the state of the credit market (frozen). The effect on the economy, direct and indirect, was easy for anyone with a modicum of training to ascertain. With the financial system in cardiac arrest, even for a relatively short time, production and consumption were sure to plunge, as surely as rocks roll downhill. The economic observers were predicting the “end of days” with justification.
It was a no-brainer! 😉
So it isn’t necessary to argue that the media coverage and economist commentary was an epiphenomena, unconnected with subsequent production and consumption declines. It’s only necessary to observe that the event that they were reacting to, and reinforcing, was real – the seizure of the credit markets. It was not made up hype for the sake of selling papers and booking shows. Production began plunging then; it was later that the self-reinforcing media message took hold.
Right now sentiment and emotion is not the driving force; no amount of serotonin and dopamine are going to overcome the debt pile. However the media are playing a substantial part: while the _supply_ of credit may be constrained for reasons unrelated to media propagated sentiment, the _demand_ for credit is also constrained, and here I believe the reason has _everything_ to do with the current sentiment, which is definitely being affected by the media.
Articles to the effect that “we’re in a depression, and _dammit_ why aren’t the banks lending?” are ones I find particularly risible.
Lewy makes a good point. I personally think we will look back on this period and wonder what the hell we could have been thinking. Horrifically awful loans and easy credit put us in a crisis, and all we can think to do is borrow more to encourage consumers to spend more… via credit if history is any judge. We’re down in a hole, we have to keep digging.
It’s hard to complain that the media is stirring up the whirlwind when there is objectively bad news everyday.
But labeling Jan. 26, 2009, “Bloody Monday” was an example of it bleeds it leads, and we’ll make it bleed. That Monday a lot of U.S. companies issued earnings reports and some with lower than expected profits and reduced expectations for 2009 tried to minimize the bad news by pointing to employment cutbacks that had occurred in the fourth quarter or that will occur in the first quarter. Some of the job losses were stated to be temps, contract employees, agency workers, and overseas employees.
The TV/radio coverage indicated that 65,400 American jobs were lost on one day alone, which is highly misleading in my view.
The problem i have is equating a recession- ie part of the natural business cycle, with a cataclysm, which seems to be the latest argument from Washington.
We haven’t even really asked ourselves if this is either unexpected or unacceptable. We seem to be so spoiled that any downturn in our economy is a disaster of the highest proportions. Certainly a worse disaster than 911 or Iraq at its worst, given the level resources now bandied about.
Isn’t what Obama and the Democrats now essentially arguing is that the free market system as we know it may be profitable for all (over the long term, which is undeniable), but it is too volatile for our modern sensibilities and therefore government must become a condenser of sorts, attempting to keep the economy from ever going negative even at the cost of vastly stifling the the growth we are accustomed to? IE- the European model?
Isn’t that what they are essentially saying? At least when they aren’t simply ringing the alarm bells as an argument?
No, I don’t think so. We are dealing, in part, with serious problems of under-regulation and near-fraud in the credit market, and with serious problems of risk-addicted philosophy stoked by the very recent creation of an upper-upper class in the financial industry. We are also working, in part, from past experience of what happened when government didn’t try to stop the decline on the way down, and the results were really not very pretty. You can choose Hoover’s policies, or you can look at the Panic of 1837.