Depression or Recession: Is Fear Overcoming Sound Economic Analysis?
Reported by Michelle Hopkins
from a presentation by
Dr. Edward Leamer, Director of the Anderson Forecast,
University of California, Los Angeles for AnalysisOnline
through the Thomas R. Brown Foundations Economics Programs
Some politicians and news organizations have likened the current financial crisis to the Great Depression while others declare the nation is in the midst of deepening recession. In reality economic indicators that have characterized past recessions are almost entirely absent from the U.S. economy today, let alone depressions, according to the director of the internationally recognized UCLA Anderson Forecast, Dr. Edward Leamer.
Leamer believes the almost daily dire assessments by the media, government officials and others are creating a deepening fear in the hearts of people around the world that is unnecessary.
If the public can resist altering consumer behaviors and succumbing to these alarms, he says, it may be possible to limit economic problems to the housing sector, much as occurred prior to the Korean War and during the Vietnam War, rather than having them spread.
“As long as we don’t let panic get out of control, we’ll be alright. We don’t need to amplify the fear, but to calm it,” Leamer told more a nationwide group journalists Media Briefing sponsored by the Suburban Newspapers of America with The Communications Institute/AnalysisOnline with funding from the Thomas R. Brown Foundations.
Another Great Depression?
Leamer said the U.S. economy most likely is undergoing a fundamental adjustment in the relationship of Wall Street, Washington D.C. and Main Street, as it does periodically. Despite frequent comparisons to the Great Depression by the news media, Leamer says, “This is not anything like the Great Depression. In the depression, we lost one-half of U.S. industrial production. Any declines in industrial production now are hardly noticeable.”
Laying the foundation for his assessment of current economic conditions against the trademark signs of recession historically, Leamer noted that one reason economists have not been able to agree if the U.S. is in a recession is that the definition of recession varies widely.
The National Bureau of Economic Research, which is functionally responsible for dating the peaks and troughs of the nation’s business cycles, defines recession as “a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.”
“Those are symptoms. That’s not a definition you can make book on,” said Leamer, noting that a better definition is two consecutive quarters of declining Gross Domestic Product (GDP), or real output of U.S. goods and services, which the nation has not yet experienced.
Understanding Employment Data
Historical markets of recession include two U.S. Bureau of Labor Statistics’ reports: Payroll Employment and Household Employment.
In slides 4 and 5 of his Powerpoint presentation, these employment indicators are plotted against known recessionary periods in the U.S. since 1950. When the country is in a recession, there is a characteristically strong drop in Payroll and Household Employment, he says. Click here to view slides 4 and 5 from Dr. Leamer's PPT presentation.
Although payroll statistics have been sluggish, there has been no sharp drop in recent years that would signify a recession.
Likewise, industrial production is taking a small hit, but nothing like the characteristic slide that occurs in a recession, noted Leamer. Click here to view slide 7.
“Only unemployment is at a historic threshold. The latest report pegs U.S. unemployment at 6.1 percent and things are forecast to get worse. We’ve already had massive foreclosures without substantial job loss. If unemployment rises sharply, we will see many more foreclosures and that will put that much more pressure on banks,” said Leamer.
What happens after that likely would fit one of three scenarios that vary by degree; Leamer believes the middle scenario – “an extended serial adjustment,” where problems with consumer durables follow housing problems, but do not parallel them, is most likely. “This would be a less severe economic downturn, but one that is more long lasting,” he said.
The Downturn and Housing
The milder scenario holds that the economy would return to normal next year, while the worst-case scenario has the economy experiencing the longest and deepest downturn since the Great Depression, with all business and consumer lending halted.
If consumers and leaders avoid over-reacting and making the current economic situation worse, Leamer predicts the U.S. cities hardest hit by the mortgage crisis (and where housing is most over-valued) will see the light at the end of the tunnel anywhere from less than one year to four to five years for the most part (with the U.S. average of 3.1 years).
The city with the most over-valued housing (Miami) should have about 2.7 years left in this slump based on current indications, he noted.
The U.S. experienced a flood of resets in the Adjustable Rate Mortgages of subprime (credit riskier) loans in 2007 and 2008, with the next wave due in 2010.
“We’re not through this yet,” he said. “Housing values are still way too high. Bakersfield, California is 44 percent above where it should be. Los Angeles-Long Beach is 29 percent too high and should be back to normal in about a year. Three states dominate the housing industry upheaval – California, Florida and Nevada.” Click here for Dr. Leamer's PPT and scroll to slide 25.
Home prices are still 20 percent over-valued – the difference between the red line and the blue line in slide 25 – and that means we “still have a ways to go,” he said.
“My belief is that our current problems involve housing and Wall Street and we ought to be treating this directly as a housing problem,” he said, noting there was nothing of substance in the $700 billion Congressional bailout package to directly aid people at risk of foreclosure.
The solution to economic problems can accrue financially to homeowners, lenders, or taxpayers, Leamer said, and he would have only homeowners and lenders, not taxpayers, picking up the tab.
“Our view is that the U.S. is not in a recession. Employment in manufacturing and construction has not seen the sharp declines like we have had in recessionary periods. Note in the chart on the right in slide 12 that, while construction is not growing by leaps and bounds, there has been a reduction in job loss and it will get less severe going forward, though certainly we’re not going to have a construction boom,” Leamer explained.
Employment in manufacturing has not experienced the volatility of past recessions, indicated by the squiggly lines on the chart on the right of slide 12. Instead, job loss has been gradual, supporting the view that the economy is making a structural adjustment only, he said.
What is Needed Now?
It’s true that banks are worried about credit flow and some are charging high rates for loans made between banks because of revenue uncertainty, Leamer acknowledges, but he has seen no big problems with the volume of credit. “It’s holding up pretty well.”
“What the public needs to do is keep spending and make an effort to put more into savings and retrench on the amount of credit families are using – but do it gradually to avoid sending the economy into a greater upset,” said Leamer.
As the U.S. entered the 21st century, the country was seeking to create a (home) ownership society, “but instead we created a consumption society that was driven by debt and dependency on foreign trade, and that was not sustainable. We are now making an adjustment as we try to come out of that and it’s critical not to over-react,” notes Leamer.
He blames government leaders – including President Bush and Congress – for feeding the fear frenzy (“That’s the last thing you want to do”) and advises that Americans seek to respond as former President Franklin Delano Roosevelt led the country – with confidence and calm.
MARCH 12, 1933:
FDR on the closing of the banks following bank runs
"I do not promise you that every bank will be reopened or that individual losses will not be suffered, but there will be no losses that possibly could be avoided; and there would have been more and greater losses had we continued to drift....After all there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people. Confidence and courage are the essentials of success in carrying out our plan.
"You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system; it is up to you to support and make it work. It is your problem no less than it is mine. Together we cannot fail."