Worst Expansion Ever!?

Calling this the “worst economic expansion since World War II” is like saying the ebola virus is the worst cold you ever had. At some level you might be technically correct, but you end up communicating confusing, even misleading, information.

This keeps coming up, despite a wealth of evidence that provides more appropriate context about the crash and subsequent recovery. A column in Real Time Economics is typical of the genre:

Since the recession ended in June 2009, the economy has advanced at a 2.2% annual pace through the end of last year. That’s more than a half-percentage point worse than the next-weakest expansion of the past 70 years, the one from 2001 through 2007. While there have been highs and lows in individual quarters, overall the economy has failed to break out of its roughly 2% pattern for six years.

The key that something is wrong is in the outlier status of the data. “More than a half-percentage point worse than the next-weakest expansion” is an enormous, Bob Beamon-like smashing of the earlier record. To better understand this data requires some context, which today’s column will provide.

First, the specifics: By just about every economic metric, this has been a mediocre, subpar recovery. For the first few years following the end of the recession in June 2009, employment increased slowly. Wages to this day have been little changed. Retail sales have been inconsistent; housing has seen soft sales numbers, while price increases have been a function of a lack of inventory caused by limited amounts of home equity and immobility as a consumer try to reduce debt. Gross domestic product growth has been weak and lacking in consistency.

The context is simple: When we discuss expansions, we typically are referring to the later half of an ordinary economic contraction-expansion cycle. That is what is usually referred to as a post-recession recovery.

However, that huge outlier is a clue that we are using the wrong data set. The post-World War II recession recoveries are the wrong frame of reference; the proper one is the much more severe set of credit-crisis collapses and recoveries.

Economists Carmen M. Reinhart and Kenneth S. Rogoff figured this out before the scale of the crisis even was apparent. In January 2008 they published a paper titled “Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison.” They warned that the U.S. subprime mortgage issue was turning into a full-blown credit crisis, not just a typical recession. I discussed this extensively in February 2008.

The economic researchers were astute enough to not use other recession-recovery cycles as their comparison when discussing the pace of growth in the U.S. economy after what they said would be a collapse caused by subprime mortgages. Instead, they suggested looking at five previous financial crises — Japan (1992), Finland (1991), Sweden (1991), Norway (1987) and Spain (1977).

These earlier financial and credit crises had several consistent elements: A prolonged and deep decline in asset prices, including equity (average of 55 percent) and housing prices (average of 35 percent). They also noted that banking crises are followed by “profound declines in employment.” The average increase in the unemployment rate was seven percentage points during the four years after the collapse. This is in line with the rise in the U.S. unemployment, rate, which increased from about 4 percent to 10 percent.

Other elements they saw as consistent with credit crises were an explosion of government debt, and costly “ambitious countercyclical fiscal policies aimed at mitigating the downturn.”

Let me remind you that Reinhart and Rogoff published their paper in early 2008 –before Bear Stearns collapsed, and well before Lehman Brothers, American International Group, the banks and government-sponsored entities Fannie Mae and Freddie Mac either failed or needed bailouts. I give them enormous credit for not only understanding how subprime mortgages were a threat to the economy, but seeing exactly how that threat would manifest itself, and how the subsequent recovery would take form.

The key point here is that credit bubbles are very different from ordinary recession recoveries. Bank crises and the long, slow painful recoveries are simply not comparable to other business cycles.

After the collapse, Reinhart and Rogoff turned their research into a book, “This Time Is Different: Eight Centuries of Financial Folly.” Anyone who wants to understand the present economic cycle should give it a read. So next time someone says this is the worst recovery since World War II, remind them that the economy is recovering from a full-blown financial crisis — not just a typical recession.



Originally published here: This Recovery Really Is Different

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  1. rd commented on Aug 3

    A primary function of government, central banks (the reason they were created), and the financial sector is to prevent financial crises. The US was plagued by repeated financial crises from after the Civil War until the Great Depression. Glass-Steagal put an end to that.

    The 2008-2009 crisis was particularly egregious because the tool (Glass-Steagal) was in place to prevent it. Active lobbying from many of the three entities (government, Fed, and the financial firms) killed it and a full-blown crisis erupted in less than a decade for the first time in over 70 years.

    All the more galling was that most of the players in this failure got out of it unscathed, and in some cases got promotions while Main Street underwent carnage.

  2. DeDude commented on Aug 3

    All GDP growth has to be looked upon in the context of demographics and workforce growth. It is easy to have 4% GDP growth if your workforce is growing by 3%; not so much if it is shrinking by 3% (just a theoretical example).

  3. 4whatitsworth commented on Aug 3

    I can’t say I agree with you on this narrative. This “credit crisis” was not as severe as the whiney wonders in NY seem to think it was it was no ebola. Sure it was a little touch and go when Lehman went down and the government wrongfully took over AIG and then took out the bond holders of GM. It also looked horrific when everyone saw their stock portfolio go down 50%. All this however was corrected in reasonably short order. By 2011 stocks were mostly back and the banks backstopped. Now here we are in 2015 with in my experience yes the “Worst Expansion Ever!”. Things clearly should have gotten better faster.

    • willid3 commented on Aug 3

      i suppose the few millions of jobs losses over the years from 2007 to 2009 didnt count? or that so many lost their houses? course if we just look at the damage from the stock market it wasnt too bad was it? but for the others, maybe it was pretty bad since many still are trying to recover, cause they are likely to never ever to get back to the incomes they had or having a home. course now if one had a small business, you might have lost it as your customers no longer could buy from you, or it shrunk. and now lots of companies are struggling with shrinking sales (even Apple is having products that dont sell so well any more).

    • DeDude commented on Aug 4

      Housing is what makes this different and much slower to recover from. You had about 6 years of fake GDP growth under Bush II, driven by government borrow and spending on war and middle class people increasing their spending by pulling home equity out of the housing bubble. GDP growth based on credit is neither sustainable nor does it come without a cost. That cost is a slow recovery after the inevitable financial crisis. The fact that the GOPsters in congress did all they could to sabotage the recovery didn’t help either.

    • funkright commented on Aug 3

      Must be nice to look onto the ROTW with rose coloured glasses… What ivory tower are you peering out of today? As the other commentator to your post mentioned, effectively, this has not been a good recovery. Not by any stretch of anyone’s imagination.

    • 4whatitsworth commented on Aug 4

      Unless I miss read this article it was about the credit crisis. No rose colored glasses here and BTW almost everyone got a shot at credit in the last cycle. Agree shrinking sales are an issue no confidence in assets what the hell happened to U.S.?

  4. Futuredome commented on Aug 3

    Real wages are little changed? I would say they are improved, especially with the commodity bubble burst.
    1.GDP data is useless thanks to the tech revolution and somewhat to offshoring. The major industrial deflation not properly caught by government stats makes these numbers VERY suspect. I suspect that is peaked in the mid-00’s while public price inflation was running 6% during the 06-07 crest reducing real wages. On the otherhand, I could see GDP more in the 3%+ range which supports employment gains and hours worked this decade.
    2.Employment needs to be 25,000 less month to match the quantity needed in the 90’s expansion. That is the demographic mark of reduced child baring and legal immigration.
    3.Credit cash flows began accelerating in the 4th quarter of 2014. They take about 12-18 months post to properly navigate through the economy and I think we are seeing that hitting Residential investment and production this summer. By this time next year, the government is going to run out of of excuses on gdp. I think the last 20 years need revised upwards. Time for some honesty even from the econ-bears.

    • willid3 commented on Aug 3

      depends on what you mean ‘changed’. have they gown a little bit since 2008? some. but i dont know i would go so far to say that they are much better.

      at least we didnt take that idea of including offshore ‘savings’ as being a plus for GDP. but then there probably lost of things in GDP that are from the industrial revolution. and manufacturing workforce is a shadow of its earlier self. and it doesnt look like the services economy id doing much to grow the economy at all. after all, how do you do that, with low wages.

    • willid3 commented on Aug 3

      and wage growth sort of depends on where you are in relation to every one else. if you are the boss (or CEO) you might not have noticed it at all;. there wage growth has recovered (if they lost much at all).

  5. JasRas commented on Aug 3

    1: We measure with outdated/outmoded tools and formulas. We can’t classify some of the growth and expansion properly, so it is left out or misplaced.

    2: We are expected to recover in a regulatory environment that has moved dramatically from too loose, to too tight with no “just right”

    3: We didn’t let the market truly clear by “saving” perhaps too many entities that should have cleared via bankruptcy or other means–so they’re hobbled shadows of former selves.

    4: The financial world not ending as we know it still didn’t alleviate many from debt held which is now a drag on their efforts. Or they have assets that are underwater still and stuck.

    5: The labor market made rapids changes in needs and qualifications and geographic locales. People couldn’t adjust as quickly as the world did, leave gaps.

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