Monday, January 19, 2009

Is this an unusually bad US recession?

The above following chart present an interesting comparison of our current U.S. recession’s percent change in employment with those of the 10 previous recessions that have occurred since 1946.

Thanks to Michael Guzzo from for bringing this data to my attention.

So on face value it looks like this U.S. recession is pretty well a median type recession so far. Until you look more closely.

Clearly employment has shrunk very slowly in the first months of this recession meaning, from this perspective, it looks much like a “median” recession. However, look at the rate of change in employment in the last 6 months - its rate of fall is much faster than earlier and this rate is accelerating.

Also worth bearing in mind that employment is probably a 3-6 month lagging indicator compared to say real GDP or retail sales and that retail sales have been decreasing 2-3% a month (yes a month!) for the last three months and that this rate of decrease is also accelerating. For more detail on retail sales see So given employment’s lag we should expect the employment to keep falling at the current rate or faster for at least 3-6 months even if retail sales turned around in January. Given that that rate of change in retail sales or real GDP is inevitably not going to turn positive in the next 3 months and probably not for at least 6 months (and possibly much longer though stimulus will give some positive bumps) we’re looking at a that employment graph heading south at the current rate of decline for 6 to 12 months. That will take the current decline in employment to worse than the harshest recessions on this graph in terms of total loss of employment. It will also mean the length of time from the start of recession until it begins to sustainably turn around (maybe somewhere between months 21 and 27 on that graph) would be much longer than longest post war recession.
In the two most recent recessions the unemployment rate actually peaked around 15 months behind real GDP so if that pattern continues it's even worse. So employment held up well early but it’s going to get uglier than in living memory and looks like living up to the “worst post war recession” hype. Having said this anyone suggesting this is great depression number II is merely speculating rather than looking at the facts . The great depression was 4 years long and involved a massive 50% decrease in GDP and was simply a bigger beast altogether than either the recessions since the WWII or the 15 contractions in real GDP that occurred from 1840 to 1920. Indeed the fact that we had the great depression has meant that policy makers and economists have to some extent learned from it. So what happens from here it will be ugly but it will have a somewhat different dynamic that the great depression.

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