Recessions Getting Longer and Worse
Why we can expect future downturns to be more severe with higher unemployment rates.
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.
Whither “Green Shoots?” -- Additional Context Since World War II
The National Bureau of Economic Research (NBER) is generally looked to as the arbiter of declaring recessions and recoveries, with back-to-back quarters of negative GDP constituting the former and two quarters without declines tending to indicate such conditions may be behind us. But those parameters don't always hold to the letter.
I personally count 10 recessions since the first quarter of 1947 but would note that there have also been a handful of stand-alone negative GDP quarters that didn’t quite qualify, usually in fairly close proximity to official recessions. Let’s take a look at some of the more noteworthy downturn eras since World War II.
The 1947-1949 downturn was marked by average sequential GDP growth of .35%. Yet the worst unemployment rate was 3.9%!
The recession beginning in the third quarter of 1953 was pretty short-lived: three quarters total. Because fourth quarter 1953 registered such a severe decline (-1.58%), the average quarterly experience for the period was -.89%. The unemployment high point was 1954’s 5.5%, well demonstrating that quantity’s generally lagging property.
The mid-1950s saw another downtrend manifesting an average quarterly sequential decline over the period of -.06%. This period also includes the worst single quarterly decline since World War II, 2.71%, during the first quarter of 1958. Unemployment for 1959 and 1960 averaged 5.5%.
The economic experience of the late 1950s was capped off by a period beginning in the third quarter of 1959 and ending in the fourth quarter of 1960 marked by average sequential quarterly growth of just .15%. Unemployment peaked in 1961 and 1962; the average rate for both years was 6.7%.
The booming 1960s followed, ending with a recession beginning in the fourth quarter of 1969. We came out of it after a 1% sequential decline in the fourth quarter of 1970, making the average sequential quarterly experience for the period -.12%. The peak unemployment year following that was 1971: 5.9%.
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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