The National Bureau of Economic Research declared America’s recession over this week. The body responsible for officially dating US business cycles has concluded that the downturn ended last June. That means the ‘Great Recession’ is the longest since the Depression. It lasted 18 months from December 2007, making it almost twice as long as the average post-war contraction.
What’s more, the recovery has been “painfully slow”, as President Obama puts it. Normally the economy regains its previous GDP peak in three quarters. Now it’s still down by 1.4% after four quarters. Previous deep recessions were followed by annual growth rates of 6%-8%; this time growth has been barely half that. It has certainly been too slow to heal the labour market: unemployment has barely budged and remains stuck at 9.6%. Meanwhile, the Fed, amid ongoing fears that growth could slide below the zero line again, signalled this week that it would launch another round of quantitative easing (QE) – pumping printed money into the economy by buying bonds – if conditions deteriorate.
What the commentators said
The reason the recovery has so little momentum is that the recession was caused by a financial crisis. Normally, a downturn happens because the economy overheats and the Fed raises interest rates to snuff out inflation, as The Economist pointed out. In the latter scenario, typical of the post-war period, demand revives with lower rates.
But credit busts “interfere with the transmission of lower rates to private borrowers”. Consumers, who account for 70% of the US economy, “can’t or won’t” borrow. That’s because the value of their collateral, notably housing, has plunged and they need to rebuild their savings and work off their debt. And banks’ capital has been depleted by huge losses on investments or loans.
Households have been paying down debt for seven quarters now, but the process is still “in its infancy”, said Capital Economics. Household debt as a percentage of disposable income has slid from a peak of 138% to 126%. It was 100% before the credit bubble really took off in 2000. With consumers in the doldrums, companies will be loath to borrow more, added Robert Reich on Robertreich.org.
Meanwhile, nobody knows whether the banks “have adequately disclosed, or even know” their ultimate exposure, said The Economist. So lending may not bounce back significantly for some time, even if demand for it revives. No wonder a study of 15 financial crises shows that deleveraging, the process of repairing balance sheets, typically takes seven years. If the US follows the script, the headwind of deleveraging means that the economy is unlikely to grow fast enough to make a serious dent in unemployment over the next few years.
The sub-par economy will be vulnerable to another recession. The stimulus is going into reverse, house prices look likely to fall further – undermining confidence and threatening more bank losses – and another debt crisis looms in Europe. If another recession looks close, the Fed would certainly throw more printed money at the economy. But it is “pushing on the proverbial string”, given that there is no demand for it, says Gary Shilling of Gary Shilling & Company. “As Japan has shown”, there are no silver bullets when it comes to the hangover from a credit bubble.