Double Dip Recession Or Year 5 Of 2007 Recession?

The EconomistThe West’s economy: How to avoid a double dip

Rich countries need to squeeze their economies less hard and get serious about growth

Anyone who managed to switch off during the summer holiday has faced a rude shock on his return. The world economy is in much worse shape than it was only a few weeks ago. Growth has slowed sharply in both America and Europe. Even the emerging world has lost some of its sizzle. Global share prices have dropped by around 15% since early July. Consumer confidence has slumped. All this has led to a grim, and sudden, reassessment of growth prospects, especially in the rich world. Forecasts for 2012 have been slashed. The odds of a double-dip recession have risen sharply on both sides of the Atlantic. In 2008 the world economy was saved from depression by a bold and co-ordinated plan to shore up banks and counter the slump with fiscal and monetary stimulus. Today there is no boldness (the euro-zone crisis is the epitome of politicians doing too little too late). There is no co-ordination. And, to the extent that policies have a common theme, it is the wrong one: politicians across the rich world are taking too short-term a view of fiscal austerity—a bout of budget-cutting which will only increase the risk of another recession.


In the past we have noted that Martin Feldstein, one of the members of the business cycle dating committee, was the holdout in calling the end of the Great Recession.  The committee works by consensus and Feldstein was not sure that the current economic expansion would make a new high.   He relented and the Great Recession’s end was dated June 2009.  The official call was made on September 20, 2010.  For the moment, it looks like his first instincts were partially correct as a case can be made that the “Great Recession” never really ended.

The NBER has dated every recession back to 1854.  A recession is a peak to trough in economic activity where the expansion off the trough results in a new high in real economic activity.  This has been the case in every recession/depression/panic ever dated.  Even the 1937 peak in economic activity (which began the 1937 recession) was above the 1929 peak (which started the Great Depression).

As the two following charts show, real GDP and personal income had their biggest falls since the end of WW2 (see the second panel of each chart highlighting the drawdowns).  More importantly, neither real GDP nor personal income have made a new high in economic activity.  If the economy continues to falter, then this is not a “double dip” but rather a continuation of the Great Recession.

Now to be clear, the ultimate trough most likely already occurred in June 2009, which is how recessions are dated (peak to trough).  However, the recession does not truly end until economic activity makes a new peak.  For the moment, that has not happened. One could argue that August 2011 is the 44th month since the Great Recession began (December 2007). Only the Great Depression (which lasted 43 months from August 1929 to March 1933) and the Panic of 1873 (65 months from October 1873 to March 1879) took longer to make a new peak in economic activity.


The New York TimesGretchen Morgenson: The Rescue That Missed Main Street

For the last three years we have been told repeatedly by government officials that funneling hundreds of billions of dollars to large and teetering banks during the credit crisis was necessary to save the financial system, and beneficial to Main Street.  But this has been a hard sell to an increasingly skeptical public. As Henry M. Paulson Jr., the former Treasury secretary, told the Financial Crisis Inquiry Commission back in May 2010, “I was never able to explain to the American people in a way in which they understood it why these rescues were for them and for their benefit, not for Wall Street.”  The American people were right to question Mr. Paulson’s pitch, as it turns out. And that became clearer than ever last week when Bloomberg News published fresh and disturbing details about the crisis-era bailouts.  Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.


Double Dip Recession Or Year 5 Of The Recession That Started In 2007?
Bianco Research, August 29, 2011

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