So, how's that economic recovery thing doing?
- U.S. GDP growth in perspective
In light of Wednesday's (unexpected) GDP report, here's a question to start things with. When did this latest (U.S.) recession end? Don't read on - have a guess first! According to the NBER, the respected authorities on these matters, it ended in June 2009. That's a whopping three and a half years ago. Doesn't feel like it with unemployment at almost 7%, 10-year yields around 2.00% and with QE3 now well under way - and now with negative growth in the last quarter. Ask your friends or your family - I'm guessing a lot of them won't think we are more than three years out of a recession. That's about half way through a normal economic cycle.
It's worth having a look at what's different about this recession from previous U.S. recessions, just from a GDP (growth) perspective.
I'd like to put this into a historical perspective and I'm going to do so by only looking at recessions defined rather more strictly (or traditionally) as periods where the U.S. saw two consecutive quarters of negative growth. Under this definition there has only been one other recession in the past 30 years, and that was over 20 years ago, back in 1991.
This is important - it means that there are a whole lot of people out there working in the investment and finance world today, who have no living memory of what happens after the U.S. experiences (at least) two consecutive periods of negative growth.
So, what does happen?
Getting back to where we started
First of all, let's look at how long the U.S. takes to recover its pre-recession level of GDP.
On average, since 1948 (excluding the 2008 recession) the U.S. has recovered its pre-recession GDP level within just less-than 6 quarters. The good news for the 'current' 2008 recession is that the U.S. has recovered past its pre-recession GDP level, achieving this a little over a year ago, but taking a staggering 16 quarters to do so, or almost three times the post-1948 average.
The chart below shows all the recessions recovery time since 1948.
So, it may not be a surprise that this recession has taken longer to "escape" from than most - hence the term "Great Recession." But what is more shocking is how fast the U.S. economy was (and is) growing when it surpassed its pre-recession GDP - think of it as a kind of "exit speed" as the U.S. economy finally "broke the surface."
Now, conventional wisdom and history tells us that deep recessions are followed by zippy recoveries with a "rubber-band" effect as the economy starts to emerge from negative growth. Though not necessarily always supported by economic studies, it's an idea that is often floated by economists and politicians alike.
The chart below measures the momentum of growth on exiting recessions by looking at the average annual growth in the four quarters around when the U.S. economy surpassed its pre-recession GDP peak - again, think of it as exit speed on surfacing.
In the majority (6 out of 9) of post-war recessions by the time the economy surpassed its pre-recession GDP, it was chugging along at a growth rate of at least 4.5%, well above the long-term trend growth rate of the United States. Which is what we would expect (or at least hope for) after a deep recession.
"….you're going to see the economy come roaring back."
Mitt Romney, September 1, 2012
Not a lot of roaring round here
This time around, with the longest and deepest recession on record and the longest period (by a long way) of recovery to a level of pre-recession GDP, average growth over the four quarters when the economy regained its pre-recession GDP was only a tepid 2.2%.
And that figure itself is not gaining any momentum - after Wednesday's release, the last four quarterly readings are trending at a dismal average of 1.6%.
So, growth there may be. But it's pretty tepid. It pales in comparison with previous post-recession phases. And it doesn't seem to be picking up any momentum despite the occasional "blip" as we saw in Q3 2012.