In December 1776, one of America’s most vocal and articulate founding fathers, Thomas Paine, penned in his essay entitled The Crisis this sentence, “These are the times that try men’s souls.” The American Revolution was in its early phase and the situation facing the people at that time was certainly considered grave by any definition.
While the situation these days is nowhere near as challenging as the one in 1776, Paine’s words nonetheless strike a chord, especially since this week the National Bureau of Economic Research (NBER) declared that the nation was in the midst of a recession that began in December 2007. The announcement undoubtedly confirmed what many Americans have lately been experiencing in their everyday lives.
The word “recession,” of course, differs in definition among economists, media, and the general public. However, traditionally, a recession has been defined as two consecutive quarters of negative growth in gross domestic product (GDP). The common usage of the term denotes a contraction phase or period of time where economic activity is reduced, not just slowing in the rate of expansion. By that definition, we are not there yet, and never got there in the so-called 2001 recession. Nonetheless, we are likely in the midst of our second quarter of decline, and the feeling among consumers and investors is undeniable.
The NBER, a leading nonprofit research organization created in 1920, characterizes a recession as a significant decline in economic activity which is spread across the economy and which lasts several months. The NBER cites as evidence of its declaration of the current recession the slippages the nation has faced over the past 12 months in GDP along with decreases in employment, real personal income, industrial production, and wholesale-retail sales. The length of the downturn noted by NBER means that the financial difficulty the nation is currently facing is already longer than the average of the myriad economic dips since the mid-1940s. While the peak in employment occurred in December 2007, it is not at all clear that it would have been designated by NBER as the beginning of a recession if it were not for subsequent events. It is not exactly like the future is causing the past, but there are some similarities.
The NBER includes prominent economists from various facets of the business world, research programs, and major colleges and universities. Through the years, the organization has focused its studies on numerous issues facing our society. Their operations concentrate on empirical research, statistical measurements, economic behavior models, and the effects of public policies. This illustrious pedigree is why any pronouncements from the organization are viewed as one of the major indicators of the state of the economy.
There are no reliable predictors of a recession, but frequently a significant drop in the stock market has preceded the beginning of a substantial decrease in business activity. However, approximately half of the time since 1946 when the market has dipped more than 10%, there has been no recession. On the other hand, about 50% of major market drops have occurred after a recession has already begun.
While there has been some fear and many media reports that the economic crisis we are now facing is the worst since the Great Depression of the 1930s, there is really no comparison. That depression was worldwide and lasted some 12 years. It was ended only by the numerous business and manufacturing activities related to World War II. Additionally during the Great Depression, around a third of the nation’s banks failed and the market dropped approximately 90%. Moreover, over that period, the GDP fell by about one third.
Another important consideration in trying to compare the current situation with the 1930s and early 1940s is that in that timeframe, policy makers essentially allowed the financial system to collapse before they started trying to fix the problem, and the Federal Reserve did little to help the thousands of banks that failed.
Today, of course, different government entities have taken broad and bold pro-active steps to stop the drift and heal the wounds around the world. Their actions are well known and vary from stimulus plans to special rescue packages. Moreover, new programs are being developed to upright the tilting financial system. The level of success of each of these endeavors will be different, but the facts that steps are continually being taken to rectify the situation and the current and incoming administration are in agreement that much more needs to be accomplished bodes well for future positive results.