The National Bureau of Economic Research (NBER) is the official institution that dates recessions in the U.S., and on September 2010 they declared the recession that began in December 2007 officially ended on June 2009 and that a new expansion had begun. Despite the economy staging a decent bounce off lows in early 2009, one of the more notable members of the NBER business cycle dating committee, Martin Feldstein, was the main holdout for calling an end to the recession. The main reason was he didn’t think the recovery would take economic activity to new highs before another downturn would hit. With the economy rolling over and at risk of moving into another recession, it looks like Mr. Feldstein’s original judgment has proven correct as most indicators of economic activity failed to exceed prior peaks. Thus, it is a fair argument to suggest the recession never ended and should be labeled “The Second Great Contraction,” with the first being the Great Recession. A pictorial review below shows what a feeble recovery this has been, particularly with massive fiscal and monetary stimulus.
Shown in the images to follow is the average recovery in various economic measures normalized to 100 at their peak versus time (months), and a figure showing the actual number of months it took to exceed the peak for past recoveries. First up is gross domestic product or GDP.
As most people know, the broadest measure of economic activity is GDP. Shown below is data going back to WW II with the average recovery taking 13.5 months to exceed its former peak. You can see that the recovery this time from the December 2007 peak has failed to exceed its former high after 42 months and still counting.
Real domestic final sales is GDP with net exports and inventories removed to get a better sense of consumer and business total demand. The average time to exceed the former peak has been 12.7 months, with the current expansion at 42 months and still counting without exceeding its former peak.
Moving on to manufacturing, industrial production has also failed to exceed its former peak levels. Inclusive of the Great Depression, the average recovery has taken 32.75 months to exceed its former peak and we are at 43 months and still counting and have a ways to go to exceed the 2007 peak.
Moving on to the heart of any recovery, employment, shows we have yet another “jobless recovery” on our hands in which we are closer to the prior trough than peak after three years. Looking at the second figure below, it is interesting to note that each recovery since the early 1980s has taken longer and longer to see employment levels exceed the prior peak, supporting the notion that we are dealing with a large structural unemployment issue in this country.
Given the amazing weakness in employment, not suprisingly personal income has also been incredibly weak and looks to be rolling over. Personal income less government transfer payments is yet another series failing to exceed its former highs despite being 38 months past its prior peak.
This Time IS Different!
What policy and monetary makers fail to grasp is that this time really is different. Typically it’s the cyclical sectors of the economy such as business inventories, auto production, etc. that lead to the variability of the economy and produce expansions and contractions. However, this time around the main driving force is a broken consumer credit cycle. Rather than leveraging up on debt like they have during every recovery since the Great Depression, the U.S. consumer has reached maximum credit saturation and instead is deleveraging and reducing overall debt levels. This has not happened since the Great Depression and the sooner Washington figures this out the better as policies to stimulate consumption such as tax breaks and more transfer payments aren’t going to do the trick. Overall debt levels must come back down further to more normal levels relative to economic activity.
The proof is in the pudding and looking below you can see how revolving consumer credit (credit cards) outstanding typically doesn’t even skip a beat in a recession and continues to expand. Contrast that to the present cycle which continues to show consumers develeraging and treating debt/credit like the plague. Of note, five of the last 6 post recovery cycles never even showed a contraction in revolving consumer credit as the former peak was exceeded the very next month, and yet we are at 34 months and counting since the former peak in this cycle!
Given employment and income has been incredibly weak and in the context of a consumer deleveraging cycle, it isn’t surprising to see nominal retail sales taking the longest time to exceed its former peak since the data has been collected. Remember that government assistance is now over 20% of disposable personal income and without government income transfers retail sales would likely be even more depressed in this cycle.
Despite nominal retail sales reaching a new high, looking at real retail sales shows we are closer to the bottom and still have a ways to go to return to former peak levels.
Since prior excesses have failed to be worked through the system, recoveries after recessions continue to be weak with now two jobless recoveries in the last decade. With debt levels still too high relative to incomes and economic levels, we are likely to remain in what Kenneth Rogoff terms “The Second Great Contraction.”