The Great Recession Continues

For most people, GDP is an economic abstraction that has little meaning. Employment levels, on the other hand, are a more compelling measure of the economy. Here, then, is a chart of total nonfarm employment, which peaked in January 2008, a month into the last recession. As of last month, nonfarm employment was a painful 4.9% off the peak.

My preferred GDP metric is the per-capita variant. I take real GDP and divide it by the mid-month population estimates from the Census Bureau, which has reported this data from 1959 (hence my 1960 starting date). By this measure, Q2 2011 GDP is 3.4% off its peak.

This chart is a look at Real GDP since 1950 with recessions highlighted. As we can see, at present, more than two years after the end of the last recession, real GDP is still 0.5% off the all-time high set in the last quarter of 2007. The recession officially began in December of that year.

According to the NBER's analytical method, which focuses on major peaks and troughs as boundaries, the June 2009 end for the last recession makes perfect sense. But if you expect the end of a recession to be a return to some semblance of economic normality, then, to paraphrase the immortal words of Yogi Berra, the last recession "ain't over 'til it's over." ...

The recession of 2007-2009 was by far the most savage economic decline over the time frame of these charts. Prior to the last recession, real GDP hit a new peak within a quarter or two of the official recession end. Per capita real GDP usually lagged a quarter before hitting its post-recession peak; the one exception was in 1990-1991, when the per capita variant required an extra three quarters to set a new peak. Employment has historically been slower to hit new highs following recessions.

The so-called double-dip recession of 1980-1982 had a non-recessionary interlude of four quarters. All three of our indicators hit new peaks within in the second quarter after the first of the double dips. Where are we today? We're now in the ninth quarter after the last recession. Real GDP is within shouting distance (0.5%) of a new peak. But real GDP per capita is less than halfway from its trough to a new peak, and, twenty-six months after the recession ended, nonfarm employment is only a bit over 20% of the way from its trough to a new peak.

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Cartoon: Double Dip Recession

Merle Hazard: Double Dip Recession

Double Dip Recession and the Failure of Keynesianism

Gary North writes:

Promoting a revamped Keynesian economic theory – one without any guarantee of job growth – is the equivalent of selling a lifetime subscription to a revamped Playboy: one without any photos. It's a tough sell. Yet this is what Keynesians are facing today. This will be fun to watch.

In the last few days, we have begun to see reports from mainstream Keynesian forecasters and economists who are talking about the possibility of a double-dip recession...

This remains the mainstream consensus: no double-dip recession, but weak economic growth and slow job growth. A few forecasters have said that unemployment will in fact increase. I have, but I am not in the mainstream...

The financial media are beginning to report statements from Establishment forecasters who are saying that a double-dip recession is looking more likely. One of the most prominent of them is Yale economist Robert Shiller. He is the co-creator of the Case-Shiller monthly report on the residential housing prices in 20 American cities. He also coined the phrase "irrational exuberance." He now thinks the odds favoring a double dip are above 50–50. He says that the job market is the problem.

He is a Keynesian. So, he calls on Congress to spend lots more money on another deficit-funded stimulus. He says that the Federal Reserve is "out of bullets." Economists rarely say this about the FED. When they do, it indicates near-panic. He assures us that "If we focus on creating jobs, it's not as expensive as you might think."...

David Stockman, who was briefly Reagan's budget director before he resigned, recently wrote an article on the gargantuan size of the Federal deficit. He made an important but neglected observation. Ever since the third quarter of 2008, the nation's nominal GDP has increased by a tiny $100 billion, but the Federal debt has increased by 25 times the GDP increase.

This means that the hoped-for stimulus has not worked. It has taken $25 of Federal deficits to produce $1 of GDP growth. This marks a major anomaly for Keynesian economic theory. The justification for government deficits in Keynesian theory is that government spending restores economic growth. Money spent by the private sector does not increase economic growth in a recession; government spending does. This has never made any economic sense, but now the non-response of the economy is exposing this original nonsense for what it always was: nonsense. The Federal deficit is skyrocketing, but the economy has barely increased, statistically speaking, and is now slowing...

The optimists are saying that the double-dip recession will not happen, but job growth will be minimal. A jobless recovery is the new normal. This is the abandonment of Keynesianism. This is loss of faith on a paradigm-changing scope. The old Keynesian formula is no longer working. Huge deficits have not led to a V-shaped recovery, or maybe any recovery. The Keynesian multiplier is barely even adding. The Federal Reserve is pushing on a string. But so is Congress. The deficits are not working.

What's a Keynesian to do?

Call for more spending, of course. Call for even larger Federal deficits. Call for bailouts of deficit-plagued state governments, which cannot get loans from Asian central banks...

The Keynesians have only one solution: deficit spending. That is all they have had since 1936. Keynes baptized deficit-spending policies that all governments had begun several years before...

Keynesians assume that money collected by means of badges and guns is far more efficient in producing economic growth than money invested in terms of a hoped-for prospect of a positive rate of return. Keynesianism rests on faith in the following:

1. Badges and guns
2. Government IOUs
3. The wisdom of government

It is based on a lack of faith in the following:

1. Voluntary exchange
2. Private investment
3. The wisdom of entrepreneurship

The government will move to gridlock next year. It will remain there for two years. The deficits will remain high. The economy will stagnate at best, or fall into a decline. There will be no major recovery that persuades voters that they are safe, that the economic future is bright.

We are seeing a loss of faith. It is all-pervasive. The voters see that Congress is impotent. The Keynesians see that the FED is impotent. The economists as a profession have rushed to the Keynesian pump to keep the ship from sinking, but the ship appears to be taking on water despite their best efforts.

read the entire essay

Cartoon: Double Dip Recession

Chance of Double-Dip US Recession is High

Robert Shiller, professor of economics at Yale University and co-developer of Standard and Poor's S&P/Case-Shiller home price indexes, told Reuters Insider he does not know where home prices may be headed, but believes the economy may be on a precarious path.

"For me a double-dip is another recession before we've healed from this recession ... The probability of that kind of double-dip is more than 50 percent," Shiller said. "I actually expect it."

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Bernake on the Economy

Federal Reserve Chairman Ben Bernanke warned Congress Wednesday that the economic outlook remains "unusually uncertain," but stopped short of revealing what the Fed might do to sustain the shaky U.S. recovery...

Instead, his semi-annual testimony offered little new policy direction, focusing on expectations that economic growth would allow the Fed to eventually pull money out of the system and raise short term rates, as the economy improves.

And while he acknowledged growing signs of weakness in the recovery, he gave a vote of confidence that the economy would avoid falling into another recession in the near term.

"We don't think a double-dip [recession] is a high probability," he said...

Bernanke said the Fed still has tools necessary to spur growth, even with interest rates unable to go any lower. But he gave few details about what the Fed might do if it decides the economy needs more help.

read the CNN article

Double Dip Recession?

The closest we've seen to a "double dip" was in the early 1980s - and the NBER dated those as two separate recessions...

Based on these graphs and the NBER memos, it would seem pretty easy to date two recessions in the early '80s. However, if another recession starts this year, it will almost certainly be dated as a continuation of the "great recession" that started in 2007.

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Cartoon: Double Dip Recession

Peter Schiff: Is the Recession Over?

In truth, because of the continued profligacy of the government and Federal Reserve, the imbalances that caused the current recession have actually worsened. We are now in an even deeper hole than when the crisis began. Rather than wrapping up a recession, we are actually sinking into a depression. If things look better now, it’s just because we are in the eye of the storm.

We must remember that recessions inevitably follow periods of artificial growth. During these booms, malinvestments are made which ultimately must be liquidated during the ensuing busts. In short, mistakes made during booms are corrected during busts – and in the recent boom we made some real whoppers. We borrowed and spent too much money, bought goods we couldn’t afford, built houses we couldn’t carry, and developed a service sector economy completely dependent on consumer credit and rising asset prices. All the while, we allowed our industrial base to crumble and our infrastructure to decay.

In order to lay the foundation for real and lasting recovery, market forces must be allowed to repair the damage. However, current policy is counterproductive to this end. Trillions in stimulus dollars have kept the party going, but now what? How does deficit spending by the government address the problems that brought about the crash? It doesn’t; it just delays and worsens the hangover – and we have to hope we don’t die of alcohol poisoning.

By interfering with the unpleasant forces of the recession, we simply trade short-term gain for long-term pain. By propping up inefficient companies that should fail, we deprive more effective companies of the capital they need to grow. By holding up over-valued asset prices, we prevent the prudent or less well-off from snatching them up and, in doing so, creating a new price equilibrium based upon reality. By maintaining artificially low interest rates, we discourage the very savings that are so critical to capital formation and future economic growth. In addition, the false economic signals the Fed sends the market prevent a more efficient re-allocation of resources from taking place and leads to even more bad economic decision being made. By running such huge deficits, we further crowd-out private enterprise by making it harder for businesses to invest or hire...

Since we have learned nothing from past mistakes, we are condemned to repeat them. As if we have not already suffered enough as a consequence of the Bush/Greenspan stimulus, Obama/Bernanke are giving ever-larger doses, which will prove lethal to any recovery. The recession is over; long live the depression!

read the entire essay

My thoughts: Schiff understands economics, people in Washington do not. The downward revision of previous quarters was the under-reported story yesterday. The fundamentals are not sound. Inflation is a looming threat. It may take three years before unemployment is below 6% again.

Feldstein: Double-Dip Recession Possible

The U.S. recession may not be coming to an end and there is a risk the economy may experience a “double-dip” contraction, said Martin Feldstein, a professor of economics at Harvard University.

“There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news,” Feldstein, the former head of the National Bureau of Economic Research and Reagan administration adviser, said today in an interview on Bloomberg Television. “We could slide down again in the fourth quarter.”

The economy could “flatten out” or “even be positive” in the third quarter, and then it’s likely to contract again in the last three months of the year as the effects of the federal stimulus program wear off and companies finish rebuilding inventories, he said.

“There isn’t going to be enough to sustain a really solid recovery,” he said, even though recent data has provided some “good news” on the economy.

read the story

My thoughts: We are headed for more economic trouble. Many are projecting an end to the current recession. I don't think real prosperity will return for several years. The recovery will was short and weak. Then we will have a serious recession to make this current one look minor.