...from David Rosenberg's insightful analysis yesterday:
September 22, 2010 – BREAKFAST WITH DAVE
SO THE RECESSION IS OVER, EH?
“The economy is not in good shape”.--Robert Hall, Chairman of the NBER business cycle committee.
The NBER is very methodical when it comes to dating the beginning and end to recessions and expansions. It may not be an exact science, but it is scientific nonetheless. The Great Recession ended in June, 2009. Full stop.
But that does not really alter the outlook. As the Financial Times put it, we are now in the midst of the Great Disappointment as it pertains to the recovery phase.
There are some out there that will claim that the economy is following a similar recovery path as was the case in 1991-92 and 2002, and in both cases, we went on for solid multi-year expansions and sustainable bull markets. The problem with this analogy is that the recessions of 1991 and 2001 were extremely mild in GDP terms, so one would have expected to see mild recoveries in the initial period coming out of the downturn. The peak-to-trough decline in real GDP in the recession of the early 1990s was only 1.4%, and in 2001 it was 0.3%. So why it is relevant to compare those mild recession-followed-by mild recoveries to the current situation when real GDP plunged 4.1% is a mystery to us. Sharp recessions are generally followed by V-shaped bouncebacks so what is really important here is that there was no such elastic band rebound this time around as there was in the early 1980s when a 2.7% peak-to-trough decline in real GDP was followed by a 7.7% recovery in the first four quarters of the expansion period; the 3.2% decline from 1973 to 1975 was followed by a hefty 6.2% bounceback four quarters later (both times we saw real GDP hit a new record high three quarters into the recovery phase). Aren’t these the The Great Recession ended in June, 2009 appropriate comparisons? Moreover, what ultimately gave the recovery its legs in the mid-1990s was the onset of the Internet mania and beginning in 2003 it was the unleashing of the asymptotic housing and credit bubble. Is there another rabbit in the hat this time around and if there is, what would it be? A government-run economy?
By now, based on when the recession ended, we should be at a new high in real GDP (in fact, back to 1947, real GDP is up 4.5% in the first year of recovery).
That has happened in every other cycle in the post-WWII – including the 1992 and 2002 periods where recoveries were tepid but not that tepid to prevent real output from attaining new all-time peaks. But as things now stand, real GDP is still 1.3% lower now than it was at the end of 2007 (in fact, getting back to that old peak will likely take another year at the very least). This is what makes this cycle so unusual – steep declines in GDP are typically followed by vigorous recoveries but this time we had the largest decline in GDP since the 1930s and despite unprecedented amounts of monetary, fiscal and bailout stimulus, the recovery has been extremely weak – real GDP growth of 3% is far less than half of what one would ordinarily expect to see coming out of such a deep downturn.
• From the lows in real GDP in June/09, 69% of the recession losses have so far been recouped.
• From the lows in employment in Dec/09, 9% of the recession losses have been recouped.
• From the lows in household net worth in 2009Q1, 28% of the recession losses have been recouped.
• From the lows in wages & salaries in March 2009, 36% of the recession losses have been recouped.
• From the lows in housing starts in April 2009, 7% of the recession losses have been recouped.
• From the lows in home prices in April 2009, 13% of the recession losses have been recouped.
• From the lows in consumer sentiment in November 2008, 27% of the recession losses have been recouped.
• New and existing home sales are at all-time lows – they have never recovered.
Hence the label “Great Disappointment” as it pertains to this so-called recovery.
Let’s not confuse this cycle with the classic post-WWII recession-recovery phase when downturns were 4 quarter corrections in GDP in the context of what was a secular credit expansion. What we are in today is a totally different animal. The plain-vanilla recession lasts 10 months; the one we apparently completed was 18 months in duration which is far more in line with the cycles that were endured before WWII when recessions lasted an average of 22 months.
As an aside, the NBER declaration is usually the kiss of death because historically it ratifies when the stock market has already priced in – the big gains
By now, based on when the recession ended, we should be at a new high in real GDP usually take place from the time the downturn ended to the actual announcement. Half the time historically the stock market is down the year after the NBER makes the announcement of the recession’s end.
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