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Recessions Getting Longer and Worse

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Why we can expect future downturns to be more severe with higher unemployment rates.

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One thing I'm genuinely grateful for throughout my business career is the immense education various mentors have afforded, in both pedantic contexts (e.g., "2 + 2 = 4, Reid, duh!"), as well as just doing their jobs and setting exceptionally instructive -- and memorable -- examples. One of those mentors (and yes, I'm hoping he'll recognize this reference if he happens to read this piece) is what I call a "ballparker" and "triangulator." "Get your orders of magnitude in your head first, Reid," he would admonish, "and that way, if you determine the answer should be somewhere in the tens of thousands, for instance, you'll know your analysis has a clunker if you come up with 80 million instead of 80,000."

This mentor was no less helpful on qualitative matters -- the other side (complementing the quantitative) of critical thinking. "You've got to know what you're looking at," he would say, "but you can't always figure that out until you've seen it from a bunch of different angles and distances. Imagine you're looking at somebody's house," he would continue. "You peer through a front window from 50 feet away, and you might see the corner of a mantelpiece and the top of a wingback chair. To conclude it's a den and there's a fireplace would be a logical inference but not necessarily a hard fact. Then try some other angles, and eventually you've got a reliable working dataset."

In ballparking and triangulating our economic downturns over the past several decades, "what's inside the house," economically speaking, appears to be a long-term trend of increasing durations and nastier unemployment inflections, with the accompanying conclusion and expectation that the current and future downturns will, on average, be severer, more prolonged, and culminate at ever higher unemployment rates.

(Author's note: In many of the charts that follow, you may notice an anomaly, in which a positive quarterly growth average will be accompanied by a downward trendline. This is because it takes higher growth rates to return to a starting point following a decline. For example, a decline from 100 to 75 is -25%. Yet to increase back to 100 from 75 requires a 33.3% increase. The average growth is 4.15% in this example, and yet the net change from the starting point is zero.)

Assessing the Basic Measures

So let's ballpark and triangulate some key quantities.

GDP (gross domestic product) is the fundamental conventional measure of a nation's economic output and it's measured in either current or various kinds of inflation-adjusted dollars. For the United States, the largest economy in the world, the ballpark is trillions of dollars a year. As of the fourth quarter of 2009, our country was putting out at the rate of about 13 and a half trillion "chained," or inflation-adjusted, 2005 dollars in goods and services annually.

That's something in excess of forty grand apiece for every man, woman, and child in the country (not just the employed). There are other nations that outdo us by that per-capita measure, I should add, but none in the aggregate... for now.

The US economy is one mighty powerful output machine, and here's a look at that machine going back, in all likelihood, to well before you were born.



The first thing you might notice is the 2005 chained dollars crossing the current dollars in -- you guessed it -- 2005, the year the two measures were equal. You might also notice that the current dollars have a steeper slope of growth since 1929; the area between the lines for the distance along this timeline to the near present indicates the inflation being adjusted for.

So We're Putting Out Trillions Annually? Then Why the High Unemployment?

Like everything else, "it's all relative." Here's another look at the American economy going back to shortly after World War II ended, 1947, instead of the year of the Great Stock Market Crash (1929) -- that is, we're zooming in with the microscope a little, but the overall impression is pretty similar.



The difference with this depiction from the previous one is that the data are quarterly instead of annual -- in addition to the shorter history overall. Because of that, the observable deterioration in the economy in recent years is more noticeable. Indeed, the new millennium has been a pretty drab period for the economy over that entire, now 10-year, time-frame. And, more recently, with the financial meltdown putting pressure on business operating costs, a major consequence has been unemployment. Just take a look at the following.


Click to enlarge


As the chart demonstrates, current unemployment trends and circumstances are both dismal and unusually severe in the context of the long view beginning in 1947. While this chart comprises data ending last year, since then the unemployment picture has worsened even more, rising from 9.3% to 9.7% currently. You have to go back about three decades to the early 1980s and the mid-1970s to find comparable extremes in joblessness.

The 21st Century Leaves A Lot to Be Desired

Let's zoom in the microscope once again -- closer this time -- and try another angle on the American economy during the first 10 years of the 21st century. While the Dow Jones Industrials and the Standard and Poor's 500 are still off 20% or more from their decade highs, the NASDAQ, rich with and heavily weighted by technology issues and the smaller cap companies known to be the prime source of job creation, is still down by half.



As can be seen, sequential quarterly GDP growth has averaged less than half of one percent and is in a downward trend overall throughout the decade.
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No positions in stocks mentioned.

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