Tuesday, October 21, 2008

Oh, It'll Be Way Worse Than The 1970's

Recession Worse Than 70's?
Thu Oct 16, 2008 3:03pm EDT
By Emily Kaiser - Analysis
WASHINGTON (Reuters) - The U.S. economy is showing disturbing similarities to patterns seen in the painful recessions of the mid-1970s and early 1980s and it may be a year or more before it resumes anything near normal growth.
Factories are filling fewer orders, companies are cutting jobs and consumers are tightening budgets so dramatically that economists now think the economy will shrink for three straight quarters -- something that has not happened in 33 years.
"We now have a consistent series of reports telling us that the deteriorating job market, falling incomes, collapsing stock market, plummeting home values, and the credit crises have forced Americans to shut down spending," said Bernard Baumohl, chief economist with the Economic Outlook Group in Princeton, New Jersey.
"Everyone, it appears, is now hunkering down in preparation of a painful recession."
A Reuters survey of economists found most think the economy contracted in the recently ended third quarter and that growth will not resume until the second half of 2009. Even then, the recovery is likely to be subdued at best.
The poll, released on Thursday, was taken after governments across the Group of Seven rich nations nationalized swathes of the banking sector and after the world's major central banks slashed interest rates in unison in an unprecedented move.
Gary Stern, president of the Federal Reserve Bank of Minneapolis, said the current episode may be worse than the 1990-91 recession, when the economy contracted for two consecutive quarters and growth was tepid for about two years.
"In view of the scope and severity of the recent financial shock, the restraint on economic activity stemming from credit market headwinds could exceed the experience of the 1990s," he said on Thursday.
At the worst of that recession 18 years ago, gross domestic product, the broadest measure of economic activity, dropped by 3 percent in the fourth quarter of 1990 and remained subpar until the first quarter of 1992.
Economists polled by Reuters think the current downturn probably won't be as deep, bottoming at a minus 1.3 percent in the current fourth quarter, but it will probably be 2010 before growth gets back to normal trends.
While the median forecast calls for three consecutive quarters of contraction, the most pessimistic views show the possibility of no growth for 18 months, something that has never happened in U.S. economic data going back to 1947.
The job market gives an even gloomier signal. The current unemployment rate of 6.1 percent is higher than in July 1990, when that recession began. Economists think the jobless rate is heading to 8 percent or perhaps higher next year. That would be the worst since 1983, when the economy was recovering from the second of back-to-back recessions.
Data on Thursday showed that the manufacturing sector in the Mid-Atlantic region crashed to an 18-year low in October, and new orders were the weakest since 1980. U.S. industrial production posted the biggest monthly decline in 34 years last month.
It is easy to construct a scenario where the current trough gets much worse. Households have virtually no cushion to sustain spending should unemployment spike. Consumer spending accounts for about two-thirds of economic activity, so the longer that stays soft, the longer the economy languishes.
U.S. consumers saved just 2.7 cents out of every dollar earned in the second quarter of 2008, and even that paltry rate was inflated by government stimulus checks that have long since been used. In the previous quarter, the saving rate was just 0.2 percent -- a fraction of a cent. During the recessions of the mid-1970s and early 1980s, consumers were putting away closer to 10 cents out of every dollar.
As the credit crisis eats away at consumers' two biggest sources of investment -- housing and the stock market -- the risk is that more people will miss payments on mortgages, credit cards and car loans, and bank losses will balloon.
It is that sort of vicious cycle that has led some economists to talk about the possibility of a depression. There is no hard and fast definition of what separates a recession from a depression, but the most widely cited rule of thumb is a 10 percent decline in GDP.
The good news is, not even the most pessimistic analysts are forecasting that -- yet.

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