U.S. economy: Depressing? Yes! Depression? No!

Bad news is never welcome, and there is always plenty of it during recession. Research economist Lee McPheters, editor of Economy@W. P. Carey, concedes that while this recession lasts, more depressing headlines lie ahead. But, he says, it is still premature to conclude that "this is the worst we have ever seen." As of now, according to the received evidence to date, we are neither in nor on the brink of a repeat of the Great Depression of the 1930s. One indicator that bears watching, he says, is inflation-adjusted Gross Domestic Product.

After many months of grim economic news, 2008 is over. Unfortunately, 2009 is expected to bring more of the same gloomy reports. While bad news is never welcome, there is always plenty of it during recession. While this recession lasts, more depressing headlines lie ahead. But it is still premature to conclude that "this is the worst we have ever seen."

As of now, according to the received evidence to date, we are neither in nor on the brink of a repeat of the Great Depression of the 1930s. In the Great Depression, real output fell for four years. In this downturn, the most likely trajectory is a decline of four quarters. As monthly and quarterly figures become available, analysts can draw comparisons with the current recession and past economic slumps.

This leads to a continuous stream of announcements that various indicators are the "worst since" some particular previous downturn. Logically, if an indicator is behaving badly and recording the worst performance in decades, this tells us the current downturn is very serious, but it also reminds us that we have seen even weaker conditions in past business cycles.

For example, vehicle sales were down by almost 20 percent for 2008, bringing domestic automakers to Washington seeking relief. The car and truck sales decline was the worst since the 19 percent fall in 1980 and the 21 percent drop in 1974. Car and truck sales may fall to 10 million units in 2009, the lowest annual level since 1982. Consumer spending fell in the third quarter of 2008 by 3.8 percent, the largest quarterly contraction since 1980.

While vehicle sales are weak, they were even weaker in 1982. Consumer expenditures are down, a characteristic of recession, but spending was down by more in 1982. As long as we are describing weakness that is the "worst since" some previous date, we know we are still in a deep business cycle downturn, but not the worst ever, not yet.

Even the New York City financial sector has seen worse economic times. According to the official labor market data from the U.S. Bureau of Labor Statistics, employment in financial services in New York City at the end of 2008 was down by 20,000 jobs from the peak of 474,000 in 2007. Although the financial crunch has hit hard on Wall Street, job losses in the sector have not yet caught up to those of the last recession.

Financial employment in the Big Apple fell by 30,000 jobs between 2002 and 2003. But some indicators are indeed in the "worst ever" category, mostly related to the housing bubble that brought on this downturn. Home prices are declining at record rates, and housing starts may be as low as 700,000 this year, the smallest production since records have been kept starting in the mid 1940s.

One indicator that bears watching is inflation-adjusted Gross Domestic Product. Real GDP is our measure of national output and the key to assessment of the overall health of the general economy. In 1930, the first year of the Great Depression, real GDP fell by 8.6 percent. This was followed by three more years of declines in GDP.

Four years after the recession began, national output was more than 25 percent below the level of 1929. As of January 15, our W. P. Carey Round Number Forecast projects that consumers will start spending again by the third quarter of this year. By the fourth quarter we expect the first signs of life in the residential housing market (see table below).

By 2010, three years after the 2007 start of the current recession, it is reasonable to expect real GDP to be growing at or near its long-term growth trend. Unemployment rates may still be high at that time, but the recession will have ended and the economy will be in the expansion phase of the next cycle.