Recession Watch: Is the Economy that Bad?
- Friday, May 08, 2009
Americans began to see the signs of the declining economy in the last quarter of 2007. Shrinking retirement accounts and rising numbers of layoffs began to hit us with the reality of economic changes. Communities and businesses, large and small, have become painfully aware of the economic recession. A lack of assurance and lots of uncertainty have led this crisis.
History shows us economies are cyclical. There is a pattern of recession then recovery, recession then recovery for years. There is great expansion, then contraction. The bigger the boom, the bigger the bust.
Economist Martin Weiss states that this “is not the typical 20th century recession. [It] is the probable consequence of a great housing bust, a massive mortgage meltdown and the biggest financial crisis in history…. It challenges the smartest minds in Washington, defies the deepest pockets on Wall Street and threatens to rip through our life with the force of a Cat-5 hurricane” (Money and Markets, 12/1/08).
Since World War II, the average recession has lasted about 11 months. The longest one to date was in 1981-82, lasting 16 months, according to The Wall Street Journal.
This major downturn is surpassing that 16-month record, which began in December 2007, states the National Bureau of Economic Research.
A Bear Market in Stocks
Today the Dow Jones Industrial Average has lost half its value, from its all-time high of 14,165 on October 9, 2007. Blue chip stocks and value stocks have been affected adversely. This bear market has a strong grasp on investors’ portfolios.
The last secular bear market in stocks was from 1966-1982 (Business Week, Finding Opportunities in a Bear Market, 12/2/08). “From 1968 to 1970, stocks dropped 36%, and then rallied briefly, before rolling over for another loss of 48% from 1973-1974. Then came another bear market bounce, followed by a final 27% sell-off from 1980-1982” (Money and Markets, 3/25/09). So there was a lot of volatility for 16 years in equities.
Although we have seen recent bear market rallies, investors can expect to wait months or even years to gain back what was lost in the market. For investors to gain back their losses, the Dow will need to rise 74% to hit its October 2007 high. Compared to a decade ago, the Dow is down 22% (WSJ, 4/18-19/09).
The unemployment rate has risen to 8.5 percent, according to the March report (Time.com). What sets this recession apart from the others is the pace of job losses. The rate of unemployment has been faster than in the past five recessions. People are watching their companies and productivity shrink. Unemployment has gone up in every state. Economists predict double-digit job losses before the market recovers. In several polls taken in recent weeks, between 50% and 67% of Americans say they are concerned they will lose their jobs (Newsweek, 3/16/09).
Louis Uchitelle, writer for The New York Times, explains how this recession is different from the last major downturn of 1981-1983 (C-Span, 4/9/09). Although unemployment was above 10% in the early 1980’s, the banks were in good shape. The government managed interest rates to fight inflation. Rates were higher for 18 months, then lowered. There wasn’t a widespread pulling back by consumers.
Uchitelle reports that in this recession there’s a credit crisis. Banks have decreased lending considerably. Businesses and consumers are discovering that access to credit is not as easy as it used to be. People aren’t buying as they did. The economy is shrinking, leading to low productivity, causing rapid unemployment. There’s a double-digit reduction in the GDP. It will take awhile to get back to full capacity of productive services. He states that it may take four years before a recovery.
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