Podcast: The year of the recession

It's official: The U.S. economy is in recession — and has been since December 2007, according to the National Bureau of Economic Research. Lee McPheters, director of the JPMorgan Chase Economic Outlook Center and editor of Economy@W. P. Carey, talks about this recession, downturns in general, and what we can expect for a recovery.

It's official: The U.S. economy is in recession — and has been since December 2007, according to the National Bureau of Economic Research. Lee McPheters, director of the JPMorgan Chase Economic Outlook Center and editor of Economy@W. P. Carey, talks about this recession, downturns in general, and what we can expect for a recovery.

Transcript:

Knowledge: On December 1st, the National Bureau of Economic Research declared that we are indeed in a recession, and, in fact, the recession started last December: December 2007. Today, we have Lee McPheters with us to talk about the recession. Lee is the director of the JPMorgan Chase Economic Outlook Center here at the W. P. Carey School of Business, and he's also editor of Economy@W. P. Carey. Lee, what can you tell us about that December 2007 start date?

Lee McPheters: Well, of course, it means that we've been in a recession for a year now. And I think that most economists were expecting that there would be a decision made, placing the start date sometime within the last year. Those that were looking at the employment data probably are quite comfortable with the idea that the recession started in December '07, because that's when employment growth seemed to peak, and there was an accompanying reduction in consumer confidence.

The whole economy just seemed to get weaker and weaker. I think that those that like to look at output measures like GDP would have been more comfortable with a recession dating starting in the middle of 2008, because that is when GDP — our measure of output — actually peaked.

But, since the National Bureau actually uses a very broad approach to measuring recession and looking at indicators that are actually, for the most part, monthly (such as employment and industrial production), I think, if you go back and look at those indicators you can see that we've had weakness for the whole year.

Knowledge: So, we've been in recession, then, for a year. How does this downturn compare to others in the last, say, 30 years?

McPheters: The average recession in the US, in the postwar period — which would be back to, let's just say, 1945 — the average is a 10-month contraction. So, we've already been in contraction for 12 months, by that indicator. And if you look at even the longest downturn — 16 months is what we saw in both 1982 and in the mid-1970s — it is likely that this downturn's going to be longer.

Knowledge: You think it's going to set a record, do you suppose?

McPheters: Well, if you look at the consensus — and there are a number of consensus-like forecast tabulations, you have the national Blue Chip panel. You have the National Association of Business Economics. But, you find that the consensus typically has a recovery beginning in the second half of 2009. That will put this recession, then at 18 months. But, I think that you could certainly find people that could develop a very cogent argument, for the possibility at least, that we could be looking at as long as 24 months.

Knowledge: What factors might lengthen the recession? What are the negatives, at this point?

McPheters: Well, everything is negative right now. And we're in a situation where we have a number of weak indicators and they're all likely to get weaker. So, the worst case would be that the credit crisis continues to constrict credit availability. The Federal Reserve continues to lower interest rates, and we get to a zero-interest-rate point and that lever is no longer working.

It could well be that consumer confidence continues to deteriorate. Housing, which got us into this particular downturn, could continue to be weak. We expect that in 2008, when the final numbers are in, we're going to have under a million housing starts. That's something we haven't seen for about four decades. It's conceivable that 2009 could be another bad year for housing. Home prices could continue to fall.

So, you could develop a worst-case scenario where all of 2009 just gives you worse and worse indicators — lower numbers for job growth, higher numbers for unemployment, an economy that can't seem to break through the credit crunch. So, that's your gloom-and-doom scenario.

Knowledge: What will a recovery look like when it begins to happen?

McPheters: Well, if the consensus is correct, what is likely to happen is that, by the middle of 2009, we begin to see home prices stabilize. We see increases in residential building. We see a return of consumer confidence. And there's significant pent-up demand because, after all, people have not been buying homes, they've not been buying cars.

They will have gone through several months of reining in their consumer spending. It's likely that one of the main bug-a-boos of this recession, which has been high energy prices, will not be an issue, at least in 2009. So, what will happen is that job growth will turn positive and we will see very slow growth in output, and consumer spending will recover. And that's really an important milestone, I think, because consumers account for about 70 percent of the economy.

Knowledge: Can we expect unemployment to lessen in the middle of the year?

McPheters: Well, if this recession is like other recessions, and it looks like it is — in fact it looks like it's going to be one of the worst recessions we've had in the post-war period — unemployment is probably going to continue to be a problem, even on past the recovery, the turn-around date.

In the recession of 1991, which was a fairly serious downturn, unemployment peaked in 1992 at about 7.5 percent. In an even longer recession, the 1982 recession, unemployment peaked in 1983 at 10 percent. Here we are in December. The most recent figure we have on unemployment is 6.5 percent. It's probably going to increase to 7 percent or 7.5 percent in 2009.

Even if we have a turn-around in 2009, it is likely that, following the pattern that we have seen in previous recoveries, unemployment will continue to trend upward all through the latter part of 2009 and into 2010. And there is certainly the likelihood that we would have 8 percent to 8.5 percent unemployment in 2010, even if we have the turn-around in the latter part of 2009 in your measures such as output and job growth.

Knowledge: I remember the last downturn. We talked about the jobless recovery. Do you remember that? Was that a rather typical scenario that we were experiencing and that we are, obviously, expecting to see again?

McPheters: Well, the recession of 2001 was really not a severe recession. It was a mild recession. Consumer spending never turned negative in that recession. Unemployment peaked at about 6.2 percent or 6.3 percent, but that peak was not reached until 2003 — two years after the recession end date, as set by the National Bureau of Economic Research. That date, I believe, was November of 2001. Unemployment continued to move upward, job growth was very sluggish, and yet, we were not in recession, we were in an expansion.

Knowledge: We are at the cusp of change: we're in the waning days of the Bush administration and we're watching as the Obama team assembles. What do you see as the chance for an economic stimulus package? What do you see the new administration doing when they come in? Any thoughts on that?

McPheters: Well, there are a number of items on the priority list for the new administration, both globally and domestically, but certainly, I think a stimulus package is going to be at or very near the top of that list. That will probably be one of the first actions that is taken and it is something that I think is going to be really necessary, because, as I mentioned, I think that monetary policy has really been implemented in a very innovative and broad ranging way. There's a lot of liquidity in the system.

There are very low interest rates and rates will probably be lower by January 20th. But, we are really not seeing monetary policy having a profound impact. This recession needs, I think, some direct fiscal stimulus. We need to get consumers spending again. We need to bring state budgets back into some sort of level of reasonable health.

And the way, I believe the current thinking is moving policy makers is towards a major fiscal stimulus package. That was originally discussed, I think, at about 150 billion. The next time you heard about it, it was 300 billion. Then, it was at 600 billion. Who knows where we're going to be in a month from now, but I would expect that this is going to be a significant package and I think it will have elements in it that make a real impact on the spending side of the economy.