About the only thing outperforming lately is the unemployment rate
Stimulus packages aside, the entire nation continues to struggle in its own ways through the recession we have to come to know all too familiarly. Despite an injection of $780+ billion into the system people are starting to demand answers as to why all of our problems haven’t been solved just yet. Such criticism belies average people’s understanding of just what went wrong and how long it will take for such things to be corrected. You can’t blame people though, you can use all the fancy charts and terms in the world but in the end what is going to hit home the most for the average American boils down to one simple word: jobs. When will they stop being lost? When will they start being created? How long until we get back to “normal”? In short, when will the recovery actually happen?
When it comes to recoveries, there are three basic types that can be identified on a graph, and they tend to follow the shapes of letters: V, U, and L.
In “V” shaped recoveries, the declines seen in a metric (say, GDP or the unemployment rate) can be sudden and sharp, but recover just as fast – with everyone going on their merry little way. Back in 1997 economists were worried about a financial crisis in Asia sweeping the globalized economy. Gloom and doom took the Dow Jones Industrial Average from an all time high of ~9300 in mid-July 1997 to a sharp low of ~7,600 by September (a 19% decline). By late November though, the markets were right back where they started from. A bad cycle came and went, and Main Street hardly noticed.
In “U” shaped recoveries, the recovery part of things takes a longer time to materialize, to the point where people actually take notice and it becomes somewhat of a big deal. Going back to the stock market example, the Dow hit an all time high of ~11,700 just after the year 2000 began. A slow decline began, exasperated by 9/11, that resulted in a low of ~7,500 in October of 2002 – more than 2 1/2 years to decline some 36%. It would not be until October of 2006 before the markets would return to their record setting ways – 4 years to rise 56%.
In “L” shaped recoveries, the word “recovery” isn’t that accurate. Instead of a recovery to a previous level, a new reality sets in for an extended period of time, perhaps even indefinitely. The top market in Japan, the Nikkei 225, hit an all time high of ~39,000 in late December of 1989. It never recovered, and stands today around 9,000 – a decline of 77%.
Below is an admittedly extraordinarily quick and dirty way of illustrating this point:
Jobs lost in recessions since 1949
All types of cycles can have their own severity – how fast they initially fall. There can be a gentle fall or a sudden crash, and obviously many situations in between. What makes the difference to Americans, though, is how long things take to “get back to normal” – whatever that normal was. There have been 10 recessions since the end of World War II, the current being the 10th. Thus far the unemployment rate has risen by 4.7% since the point of peak employment in 2007. We are currently in the 19th month of job loss. There were only two recessions to bottom out this late in the game or later – the 1990 recession (peak unemployment increase: 1.4% – though that mark had remained stagnant since month #9) and the 2001 recession (peak unemployment increase: 2.0% – taking from months #24 – #30 to bottom out before rising). There has only been one recession with a deeper loss of jobs from peak employment, the 1948 recession in which the unemployment rate increased by 5.2% in 13 months. With the exception of 1990, 2001, and the current, the other seven recessions were already back on the road to recovery by this point in time – the 1948 recession already having trimmed 2.1% off of employment by this point.
With the exceptions of 1981, 1990, 2001, and the current recession, all previous recessions have followed a “V” pattern – quick down and, in most cases, quick back up. Only these four standout recessions took a “lengthy” amount of time to get back to “the way things were” – the 2001 recession being the gold standard of slowness, taking 46 months to get “back to normal”.
R.I.P. "The Bubble": 1999 - 2006
I continue to put phrases such as the way things were and back to normal in quotations, because getting back to the way things were is all from a position of relativitely. If people are seriously expecting the stimulus package to return America to how things were economically in the middle of this decade, then they do not understand just how make believe those days were. Sure, from a foreclosure and debt standpoint those days were and still are rather real, but from a standpoint of that’s just how the way things are supposed to be, it would be ludicrous to entertain the notion that we could seriously go back into a world were people can flip their houses for insane profits on a 3-to-5 year basis. If what people’s beliefs of “normal” actually amount to be “the way things were five years ago” then these people are going to be in for a rude awakening. Unfortunately as an aside, the politicians elected to bring about such returns to glory will be in for rude disturbances of their own – suddenly finding their selves blamed for not being able to return to a level of prosperity that was, in the final analysis, never sustainable.
The home ownership rate peaked in this country at the start of 2005 at 69.2%. Since then a steady decline has dropped this rate to 67.3% – a rate not seen since the middle of 2000. The year 2000 was still a bubble year, however. “The way things were” would take us down to an ownership rate near 64% – a rate not seen since 1994 – but a rate that was maintained rather tightly (+/- 1%) since 1965. That is roughly eleven years of city and urban expansion that has led to our suburban sprawl lifestyles of today. Will that have to “normalize” as well?
If there is going to be real, true recovery in this country – the kind of recovery that benefits all the working people – that recovery is going to have to come in the form of wages – wages which never really went along for the ride during the bubble years.
Minimum wage, adjusted for inflation, since 1938
The boom years that we have expierenced certainly were not the fault of rising wages. In terms of purchasing power we are as good off now as we were in the mid 1970′s. The boom was fueled by things such as the stock market and, later, the housing market. These are not things that are going to pay off and make people rich quickly. Without extra thousands of dollars floating around to be put toward the purchasing of new homes, cars, and electronics – and without the easy credit world to take people above and beyond what they could have ever afforded otherwise, the readjustment to “the way things were” in of itself almost guarantees that our recovery will be long, slow, and “L” shaped. We may adjust to a new economic norm in the meantime, never quite getting back to where we were, at least not for some lengthy time to come.
The Dow Jones Industrial Average closed at an all time high of 14,164.53 on 9 October 2007. Based on Friday’s closing price of 8,146.52, the markets would have to rally 73.87% to get back to “the way things were” – and if you count the cycle low of 6,547.05 the markets would have to rally 116.35% to get back there. There is not an economic indicator in sight, no matter how rosy the predictions are, that would say such a turn around in the economy – and thus the stock market – are anywhere in our near future.
The burning question is if the public will accept the new reality that we might just be walking into…
