The end of the recession will be announced long after it is over. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) waited until July 2003 to declare that the 2001 recession ended in November of that year. The NBER also waited until December 2008 to announce the current recession had begun one year earlier.
If this recession isn’t already over, it will be soon. However, the economy will continue to struggle to gain traction in the coming months.
One of the most intriguing aspects of the current recession is its broad geographic reach. As of mid-July, only one of the nation’s 384 metropolitan areas was not in recession (Bismarck, N.D.). Signs of moderation in the downturn have been most apparent in Texas and its neighboring states; in Mountain West states like Colorado; and in scattered areas of Massachusetts and the rest of New England.
Real GDP
According to the Bureau of Economic Analysis, real gross domestic product (GDP) declined at a 1 percent annualized rate during the second quarter of 2009, somewhat smaller than the consensus expectation of negative 1.5 percent. This followed a contraction of 6.4 percent during the first quarter and represented the best economic performance since a 1.5 percent annualized increase during the second quarter of 2008.
Real GDP is expected to expand 2.3 percent during the current quarter and 1.9 percent in the fourth quarter. In other words, the recession will end during this period. Important sources of improvement will include residential construction, investment in equipment and software, and personal consumption. Next year, GDP should expand roughly 2 percent.
Employment
In July, the nation lost another 247,000 jobs—the smallest decline since August 2008 and better than the consensus expectation of 275,000 job losses. Auto manufacturers actually added jobs and the loss in business services moderated, down 38,000 from 106,000. Losses also moderated significantly in financial services (down 13,000 from 29,000 in June).
While much media attention was paid to the decline in unemployment from 9.5 percent in June to 9.4 percent in July, this largely can be attributed to seasonal factors. Much more important in the July jobs report was the increase in the average length of the workweek, from 33 hours to 33.1 hours. (This improvement was particularly apparent in manufacturing, where the average workweek increased from 39.5 hours in June to 39.8 hours in July). This suggests that existing workers are being asked to do more, a leading indicator of slowing layoffs and eventual hiring.
That said, the labor market is under considerable duress. The median and average durations of unemployment remain at or near record levels. Further, the construction industry continues to post large losses, and the proportion of workers who have been dislocated for more than half a year is still rising.
Declining labor force participation also indicates growing disaffection with job prospects, and the employment-to-population ratio continues to fall. (It stood at 59.2 percent in August, a ratio of 139,649 to 236,087.)
National job losses should end during the latter part of the first quarter or during the second quarter of next year. However, based on previous downturns, persistent monthly job gains will not become apparent until 2011.
Thank You, Wall Street
While many blame Wall Street for much of the current economic crisis, the gains in financial markets during the past few months have been most welcome. As of early September, the Dow Jones was approaching 9,300, the NASDAQ was perched at nearly 2,000 and the S&P was hovering around 1,000. Year-to-date, the Dow is up 6 percent, the NASDAQ is up 25 percent, the S&P 500 is up 11 percent and the Russell 2000 is up 12 percent.
Of course, that’s not to suggest that all is well in the world of finance. The Federal Reserve and Treasury officials now are racing to prevent the commercial real estate sector from becoming the next albatross around the neck of U.S. banks. The commercial mortgage-backed securities sector experienced a delinquency rate of 3.14 percent in July—more than six times the level of a year ago. Part of this is the result of flawed, excessive underwriting, but a weak economy also has pummeled the performance of commercial realty across the nation.
Analysts seem to agree that banks’ losses from commercial mortgages have the potential to expand strongly, forcing property into liquidation, reducing commercial real estate valuations and further frustrating developers. The value of construction put in place figures released each month by the U.S. Census Bureau indicate the deepest weakness is concentrated in segments associated with developers, such as lodging, office and commercial construction.
Looking Ahead
Eventual job recovery will be led by retailers, distributors, manufacturers, residential construction, the federal government, financial activities, and leisure and hospitality.
However, the emerging recovery could be brief, with economists actively discussing the possibility of a double-dip recession. This situation would be attributable to limited consumer spending and investment growth caused by rising interest rates and taxes during the next two to three years. Ongoing adjustment of state and local government spending also will contribute to the fragility of the economic expansion.
![]()
Friday, September 3, 2010