Recessions Getting Longer and Worse
Why we can expect future downturns to be more severe with higher unemployment rates.
The 1970s was a dreary time for the American economy. From the third quarter of 1973 through the first quarter of 1975, -.40% was the average sequential quarterly change in real economic output. Unemployment peaked in 1975, with an average rate for that year of 8.5%.
From the second quarter of 1980 through the third quarter of 1983, shown above, the average quarterly sequential experience for real GDP was -.06%. In 1982 unemployment surged to 9.7%. In 1983 that figure stood at 9.6%.
The early 1990s experienced a slump reminiscent of that “shorty” during 1953-1954. It lasted just three quarters beginning in the third quarter of 1990 and registered a sequential experience averaging -.45%. Unemployment peaked in 1992 at 7.5%.
The following is a reprise look at the new millennium in toto as opposed to isolating downturns, so that we have it fresh in mind to examine the “here and now.” Again, it shows that the decade has been a mixed bag, often lackluster, with an average sequential experience of .45%.
The first decade of the 21st century as backdrop, the next chart takes a look at the eight most recently reported quarters, a period with a negative overall sequential experience in real GDP growth, despite sharp upturns over the two reported quarters closing out 2009 that have pushed the trendline positive even with an average experience of -.22% sequentially overall.
In conclusion, it should be noted once again that the worst quarterly post-war experience was the first quarter of 1958 at which time the economy declined 2.71%.
And, despite recent upturns, economic output remains below its highs in both current dollars and chained 2005 dollars as of the close of 2009. The current-dollar rate of output as of then stood at $14.4538 trillion annually versus that quantity’s peak rate of $14.5467 trillion as of the third quarter of 2008. Taking away the inflation effect, however, and the current output rate as of the fourth quarter of 2009 in 2005 chained dollars at $13.1495 trillion annually lags the 2008 second-quarter peak of $13.4153 annually.
Regarding unemployment, the most logical comparisons would seem to recall the 1970s and early 1980s, those two downturns lasting seven and 10 quarters respectively and showing comparable unemployment. Given the duration of current worrisome circumstances, that may suggest unemployment has peaked but doesn’t guarantee a prospect of immediate substantial declines, especially considering that the economy today finds a far greater share of output generated by capital-intensive sectors (e.g., finance) than was the case for the economic output far more heavily dominated by labor-intensive manufacturing 28-35 years ago.
Over the entire post-war period it would seem that duration of recession rather than respective quarterly severity has more effect on unemployment; perhaps employers learn how to get along with fewer workers longer term through productivity changes. This conclusion would conform to technological and other improvements over time, augmenting and exacerbating the trend toward capital versus labor intensity noted above, further suggesting that future recessions will generally culminate in successively higher unemployment levels over the long term.
Reid Holloway is a strategic consultant and a Realtor. He created The RLH Volatility Model (http://stocksthatwiggle.com).
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