How Deep Will the Recession Go?

By John Miller, Dollars and Sense. Posted February 8, 2008.

It's not only radical economists and cyberspace Cassandras uttering the "r"-word nowadays. Just what are we to make of it when Harvard economists, The Economist magazine, and Morgan Stanley followed by Goldman Sachs and Merrill Lynch say the economy is headed toward, or already in, a recession?

You can bet the house, whatever its current value, that hard times are on the way -- more layoffs, fewer new jobs, lower wages, tighter family budgets, more debt, and higher poverty levels. This year will see rising economic hardship even if the U.S. economy scrapes by without sinking into an official recession, usually defined as two straight quarters of declining output.

How do I know this? Hard times have been the hallmark of the U.S. economy during this decade, even as the economy expanded. We will be in for more of the same, but worse, as the economy slows and the inevitable downturn in the business cycle exacerbates the economic injuries many people have already sustained thanks to long-term shifts in the U.S. economic system.

And Those Were the Good Times

For a while now, there have been plenty of signs that the overall U.S. economy is headed south. Economic growth stalled in the last three months of 2007, adding only 0.6 percent to output after correcting for inflation. In December, job growth ground to a near halt, and the economy lost 17,000 jobs in January, as construction suffered large job losses. The unemployment rate jumped to 5.0 percent for the first time in three years, and would be much higher if the labor force participation rate -- the fraction of the population either working or actively looking for work -- were at the same level as when George Bush took office. On top of that, retail sales tanked in December as worried consumers cut back on holiday spending. Finally, the terminally volatile stock market registered one of its worst Januaries on record, enough to induce a panicked Fed to make an emergency interest-rate cut.

But even leaving these and other recent numbers aside, U.S. economic performance this decade has been nothing to write home about. The economy has now expanded for 74 straight months, from November 2001 to December 2007, far longer than the usual 51-month postwar expansion. But economic growth has been the slowest of any postwar expansion, averaging just 2.8 percent a year, far below the 4.3 percent average posted by earlier postwar business cycles of similar length. Worse yet, the economic growth that has occurred has done so little for so many -- and so much for so few.

• Employment expanded by just 0.9 percent a year since the recovery began, compared with an average of 2.5 percent for all recoveries that have lasted at least this long.
• After correcting for inflation, weekly wages were just 1.9 percent higher in October 2007 than at the onset of the last recession in March 2001. The average postwar expansion drove wages up by twice that amount, 3.8 percent.
• Seven million more people were without health insurance in 2006 than when the expansion began in 2001.
• Median household income actually fell during this recovery. After correcting for inflation, median household income in 2006 (the latest year for which data are available) was down 2.0 percent from its 2000 level, and down 8.0 percent for black families.
• The poverty rate was 12.3 percent in 2006 (again the latest year available), down from 12.6 percent in 2005, but still a full percentage point above the 11.3 percent rate at the onset of the last recession.
• U.S. inequality reached levels not seen since the 1920s as the average real (inflation-adjusted) income of the richest 1 percent of households rose 34.8 percent from 2001 to 2005, while rising just 0.8 percent for the middle fifth of the population and falling by 3.0 percent for the poorest fifth.
• And corporate profits skyrocketed. Inflation-adjusted corporate profits rose 12.8 percent a year during the first five years of this recovery, compared to an 8.3 percent average growth rate in the other postwar recoveries lasting at least as long.

No wonder 7 out of 10 people think the U.S. economy is heading into a recession, according to a recent poll conducted by the Economic Cycle Research Institute, a New York-based independent think tank. For many, the recession that began in March 2001 and ended, officially, that October has in reality continued straight through the decade.

Pop Goes the Housing Bubble

Besides punishing people who work for a living and those who can't even find a job, the 2008 economy will face a financial crisis brought on by the bursting of the housing bubble. How bad will it get? Pretty bad. A decade long stagnation, as Harvard economist Larry Summers suggests, or "the worst housing bust ever," as NYU professor Noureil Roubini suggests, are not out of the question. Here is why.

See more stories tagged with: recession, lending crisis, depression, consumerism, economic growth, wealth, inequality

John Miller is a professor of economics at Wheaton College and a member of the D&S collective.