Exports from the United States tell the tale of this recession. Exports fell in line with the worst previous U.S. exports recession (1958), but no worse. It’s a global recession to be sure but foreign demand held up better than in the United States, particularly at the beginning of the recession. As with imports, exports tend to flatten out before the end of the recession. It seems that not only Asian economies have benefited from export led recoveries. And, in the current recession exports are showing signs of stability.
Durable consumption, the most volatile component of consumption, has also fallen sharply in the current recession, although by a smaller amount than the cumulative decline associated with the 1958 recession. Durable consumption leads the end of the recession more than any other component of demand, turning up more than a full quarter before the end of the recession. In the current recession, durable consumption actually increased in the first quarter. However, this increase was more than undone in the second quarter. I have not looked at the detail but I suspect the bobble is attributable, in part, to the bankruptcy difficulties of the auto makers early in the quarter. These temporary concerns may have pushed demand for cars across quarters. Too, by the second quarter it was becoming increasingly obvious that the U.S. government would at some point subsidize car sales. Savvy consumers then may have postponed purchases to benefit from the subsidy.In any case, there has never been a post-war recession that has not been followed by a steep surge in durable purchases. The economics behind this surge is clear. Durables are durable. The service flow from refrigerators and cars diminishes only slowly. Purchases of these items are easy to move across time. So, once the stress of the recession ebbs, particularly labor market stress see next, consumers begin to restock their durables. Interestingly, however, the speed of the recovery seems independent of the extent of the decline, implying that some consumption is forgone permanently.
Residential investment is, in reality, simply the most important component of durable consumption; however, in National Income Accounting, it is treated as investment. As I have noted before, residential investment is a leading indicator. It peaks before the beginning of the recession and troughs before the end. And, residential investment was an early hallmark of this recession; but, with the constant stream of bad news last fall, it is easy to lose track of just how far the housing market has fallen. Just over the last three years (we are missing two quarters of decline), the fall in residential investment has bested the worst recession by more than 50 percentage points, falling by well more than 50 percent. The fall in residential investment continued through the second quarter despite several massive intervention attempts, including direct intervention in mortgage markets and a $7,000 dollar subsidy to first time buyers. I have trouble picturing a recovery that does not include a recovery in residential investment. The ongoing sharp fall is bad news on that front. However, data since the second quarter has shown some signs of hope and housing starts are turning up. If the turn is real and not temporary induced by temporary government incentives, the recession is likely to end after the third quarter.
I have discussed the importance of initial claims for identifying turning points in the data (see this post). Initial claims are a timely indicator of the firing rate in the economy. As soon as this rate stops rising, the economy begins to recover. This is both causal, employed households have less fear of losing their jobs and begin to spend, and coincidental, firms see better conditions and stop firing workers. As claims begin to drop sharply, the recession is over. This is an extra important indicator because claims data is a timely, if noisy, indicator. So, even though the change in claims is coincident with the end of the recession it is available sooner than other macro data.
I have discussed the importance of initial claims for identifying turning points in the data (see this post). Initial claims are a timely indicator of the firing rate in the economy. As soon as this rate stops rising, the economy begins to recover. This is both causal, employed households have less fear of losing their jobs and begin to spend, and coincidental, firms see better conditions and stop firing workers. As claims begin to drop sharply, the recession is over. This is an extra important indicator because claims data is a timely, if noisy, indicator. So, even though the change in claims is coincident with the end of the recession it is available sooner than other macro data.Looking at the pattern of weekly claims since the end of the second quarter, the sharp downward trend is hard to spot. Claims seem stuck between 550 and 600 thousand per week, a rate I consider inconsistent with full-on recovery. Despite the horrific jobs numbers we have experienced in this recession, the rise in claims is not as big as in the worst recession (1975) nor is it as bad as the second worst, 1958.
With the debate and eventual passage of an almost $1 trillion dollar stimulus earlier this year came a barnstorm of economists either touting the benefits of fiscal stimulus or warning against its potential inefficacy. Romer was in the former camp while I fell in the latter. It turns out, however, that we were all arguing with air. Take a look at the total government outlays chart below. Total government outlays includes all government spending and all transfer programs; quite simply, it is total government spending. The level of government spending is almost unchanged during the recession (periods before the zero) and only jumps slightly above trend in the periods after. Whatever the multiplier, it is not going to influence the trajectory of the economy in any substantive (read measurable) manner with these small changes. We have no idea what fiscal spending does.
The spending in the current recession will give us our one experiment. The rise in government outlays, from an already elevated point, should if the multipliers are high lead to a faster-than-normal recovery. In any case, the rise in government spending is somewhat stunning. But one data point is still just an anecdote.
Conclusion
Among the key things I learned from these charts is that the depth of the decline has very little to do with the pattern of recovery and that it takes about two years to recover in level terms from each downturn. This makes sense to me and was also consistent with the recoveries experienced by Argentina after its 2001 collapse, the Asian economies following the Asian Financial Crisis, and Mexico following the Peso Crisis. In other words, bad things happen and then they get better. The only post-war economy that didn’t fully recover from a crash is Japan. Japan has more or less stagnated for the past 20 years.
With the debate and eventual passage of an almost $1 trillion dollar stimulus earlier this year came a barnstorm of economists either touting the benefits of fiscal stimulus or warning against its potential inefficacy. Romer was in the former camp while I fell in the latter. It turns out, however, that we were all arguing with air. Take a look at the total government outlays chart below. Total government outlays includes all government spending and all transfer programs; quite simply, it is total government spending. The level of government spending is almost unchanged during the recession (periods before the zero) and only jumps slightly above trend in the periods after. Whatever the multiplier, it is not going to influence the trajectory of the economy in any substantive (read measurable) manner with these small changes. We have no idea what fiscal spending does. The spending in the current recession will give us our one experiment. The rise in government outlays, from an already elevated point, should if the multipliers are high lead to a faster-than-normal recovery. In any case, the rise in government spending is somewhat stunning. But one data point is still just an anecdote.
ConclusionAmong the key things I learned from these charts is that the depth of the decline has very little to do with the pattern of recovery and that it takes about two years to recover in level terms from each downturn. This makes sense to me and was also consistent with the recoveries experienced by Argentina after its 2001 collapse, the Asian economies following the Asian Financial Crisis, and Mexico following the Peso Crisis. In other words, bad things happen and then they get better. The only post-war economy that didn’t fully recover from a crash is Japan. Japan has more or less stagnated for the past 20 years.
All told, I would judge the indicators point to a recovery that will not happen before the fourth quarter. Only the most nascent signs of recovery are apparent (ignoring survey data). But, nascent signs are better than none.
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