The U.S. economy has recovered slowly since the official end of the Great Recession in 2009. Mark Lasky and Charles Whalen of the Congressional Budget Office just released a study asking why. Their answer: two-thirds of the slowness (relative to past recoveries) reflects weak growth in the economy’s potential. The potential labor force, capital stock, and productivity are all growing less rapidly than they did following past recessions. The other third reflects cyclical weakness, particularly in government, housing, and consumer spending.
CBO’s Maureen Costantino and Jonathan Schwabish turned those results into a nifty infographic (click to make larger):
[T]hose keeping faith in recovery also point to the fact that the yield curve has not inverted – 10-year bonds still yield 2 percentage points more than two-year bonds. Given that the 10-year yield has dropped below the two-year (and the three-month) before every recession since the second world war, perhaps a double dip is not looming.
Unfortunately, a quick glance at Japan suggests that once short-term rates hit the floor, the yield curve may no longer be a valuable indicator. While it warned of the recession that followed the bursting of Japan’s bubble, it missed the three recessions since.
Researchers at the San Francisco Fed took a crack at this question a few weeks ago. Their answer? It depends.
When they used a traditional model based on the leading economic indicators, the probability of a second dip turned out to be about 25% over the next two years (the blue line). When they dropped one indicator from their model, that probability doubled to about 50% (the red line).
That important indicator is the yield spread–the difference between the 10-year Treasury interest rate and federal funds rate. In recent decades, the yield spread has done a terrific job at anticipating recessions. When the federal funds rate has risen above the 10-year rate, the economy has invariably fallen into recession.
As I noted briefly the other day, the relative steepness of today’s yield curve (10-year rate about 2.5 percentage points above the fed funds rate) thus suggests, by itself, that renewed recession is unlikely, despite recent weak economic data. On the other hand, there are reasons to believe that this time things are different (usually a scary phrase). After all, fed funds rate has been pushed down almost to zero and yet the economy no longer appears to be responding. That’s exactly the logic that inspired the SF Fed researchers to try their model without the yield spread.
The Bureau of Economic Analysis rewrote history on Friday. Along with GDP data for the second quarter, BEA also published revisions to its GDP estimates since the start of 2007.
Bottom line: The recession was worse than originally thought. The economy contracted by 4.1% from peak to trough (Q2 2008 to Q2 2009), up from the 3.9% previously estimated.
The Great Recession has thus solidified its position as the worst downturn since World War II:
As painful as it has been, the recession remains a far cry from the Great Depression, when economic activity plummeted almost 27%:
Which raises an important question: Just how close did the Great Recession get to being the Great Depression 2.0?
Mark Zandi and Alan Blinder took a crack at that question in a paper released last week. Their answer: If it weren’t for aggressive monetary and fiscal policy responses, the U.S. economy would have contracted more than 12% during 2008, 2009, and 2010 — about half a Great Depression (and arithmetically, but not economically, comparable to the demobilization after WW II).
During the initial years of the housing downturn, optimists sometimes offered the following argument: “Everyone has to live somewhere. If a family loses their home to foreclosure, they will become renters. Their new residence might be smaller and less desirable than their former home, but from the perspective of housing units it’s a wash: their former home becomes vacant, but a previously empty rental becomes occupied. That should limit downward pressure on housing overall.”
That argument contains an element of truth: many foreclosed homeowners do indeed become renters (some even become homeowners again). But I’ve always wondered how many former homeowners follow a different path and instead move in with their parents, friends, or roommates, rather than getting their own place to live. Similarly, I’ve wondered how many young adults have delayed starting their own households and instead have stayed at home longer.
On Wednesday, the Mortgage Bankers Association released a study by Gary Painter (sponsored by the Research Institute for Housing America) that examines this question. His answer? America lost 1.2 million households from 2005 to 2008, despite ongoing population increases. Oh, and we likely lost even more households in 2009.
Needless to say, that retrenchment contributes to the ongoing overhang of vacant homes and rental properties.
As one piece of evidence about changes in household formation, Painter looked at the fraction of households that were overcrowded, which is defined as having more people than rooms. He found that overcrowding rates increased sharply from 2005 to 2008 (the most recent year for which he had data):
Earlier today, the Federal Reserve released its latest data on industrial production. Bottom line: production over the past three months has been surprisingly strong. Growth in September was more than expected, and the previous month was revised upward.
Industrial production has now increased for three straight months, as has a slightly narrower measure, manufacturing production:
As you can see, manufacturing production turned consistently negative in January of 2008 and then fell off a cliff toward the end of the year. After declining in 17 of 18 months (driving manufacturing production down a total of 17%), manufacturing production has now risen for three straight months (for a cumulative rebound of about 3%).
Manufacturing still has a long way to go. But the recent strength in industrial production, generally, and manufacturing, specifically, adds weight to the view that the recession may have ended early this summer. (Recall that the last recession ended in November 2001, even though job losses continued long afterward.)
I suspect that other bloggers (not to mention the regular media) will have lots to say on the stimulus analyses, so I started my reading with the clunkers piece, which I found quite interesting.
News accounts often describe the program as a success because almost 700,000 people participated in it in just a few weeks. But, as CEA emphasizes in their new study, the fact that someone participated in the program does not necessarily mean that they bought a car because of it. Indeed, CEA estimates that the 690,000 auto sales under the program boosted 2009 auto sales by only 330,000:
Yesterday’s GDP report confirmed what many had already suspected: the current economic downturn is the worst since World War II.
According to the advance estimate, GDP fell at a 1.0% annualized pace in the second quarter, somewhat better than consensus estimates (which were looking for a decline in the 1.5% range). Revisions to last year, however, revealed than earlier parts of the recession were more severe than originally estimated.
Putting it all together, GDP has declined by an estimated 3.9% over the past four quarters. That edges out the recession of 1957-58, when GDP fell by 3.7% in just two quarters, as the deepest contraction in GDP since World War II.
To put this in context, the following chart shows the magnitude of all GDP declines since 1947:
There have been 25 such declines, ranging in length from one to four quarters. The current downturn beats all the others.
There wasn’t room to include the dates of the downturns in that chart, so here’s one that shows just the top five declines: