Recession: How Long and How Deep?

We are already in recession by most accounts as I said on this blog yesterday. But, today I went back and looked at some of the historical employment data to see what the data said about Employment and recessions. What I was able to find out is that Employment is indeed a coincident to lagging indicator of recession. By that, I mean that employment has turned down in every business cycle in the last 50 years either right when or AFTER the recession began. The last time employment started to turn before the business cycle turned was in the recession of 1957-58 The data go back to 1939 and employment turned before the economy twice before 1957, in 1945 and 1948-49.

So the long and short of it is: we are definitely in recession. And according to Gary Shilling, this recession is going to be a big one. Worse than 2001, 1990-91 or the double dip recession of 1980-82. Shilling gave an interview to Bloomberg’s Tom Keene on Feb 27th in which Shilling compared the severity of the present downturn to the 1957-58 and 1973-75 downturns, which resulted in declines in the economy of 3 1/2 percent of real GDP.

The interesting bit is that he also indicated that this recession does have the potential to be even worse because he’s looking for consumer spending to really take a hit (-1.6%). In those other recessions consumer spending did not need to fall as much (only -0.6%) because we were saving more.

Right now, we have a negative savings rate in the US. That means we are spending more than we earn. The reason: Americans have been ‘over-consuming’ by borrowing and taking out equity from their homes. But, with house prices likely to decline, consumption will have to be ratcheted back. What’s more, Americans, used to having inflated asset prices in real estate and stocks do the savings for them, are going to have to get used to saving more in traditional ways in order to pay for retirement. This prospect will cut consumption by even more.

Anyway you look at it, we are in for one very difficult stretch in the next few years ahead.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.