When Will the Recession End?

Don NicholsProfessor Emeritus of

Economics and Public Affairs,UW-Madison: The La Follette School of Public Affairs, and

WAGE 5/5/09

Total GDP (Constant Dollars)

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,00020

00 D

olla

rs (I

n B

illio

ns)

GDP Quarterly Growth

-7.00

-5.00

-3.00

-1.00

1.00

3.00

5.00

7.00

9.0019

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

Perc

ent G

row

th

GDP Four Quarter Percent Growth

-0.03

-0.02

-0.01

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08 1

977

197

8 1

979

198

0 1

981

198

2 1

983

198

4 1

985

198

6 1

987

198

8 1

989

199

0 1

991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Perc

ent G

row

th

Pct. Growth in Non-Farm Employment

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

Gro

wth

in la

st 1

2 m

onth

s

US WI

Wisconsin Unemployment Rate Matches the US in March at 8.5% (seasonally

adjusted)

• The March Wisconsin seasonally adjusted unemployment rate was 8.5%, the same as the U.S.. February was slightly revised up from 7.7% to 7.8%.

• The WI unemployment rate growth in the last three months closed a gap of 1.3 percentage points with the U.S. as shown in the Chart (left).

• The non-seasonally adjusted unemployment rate in March was 9.4% in Wisconsin, higher than the national rate of 9.0%. The unadjusted March rate was 4.4 percentage points higher than the rate of 5.0% for Wisconsin in March of 2008.

• In the last 50 years, Wisconsin unemployment rate only reached the current level of unemployment during the early eighties recession. See Chart (right)

4%

5%

6%

7%

8%

9%

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09

Wisconsin U.S.

2%

4%

6%

8%

10%

12%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Wisconsin U.S.

Unemployment Rate, Seasonally Adjusted

Three Bubbles Have Popped

• 1 Housing was Over-Built in 2003-2007

• 2 Housing got Over-Priced in the same period

• 3 Housing was irresponsibly financed as part of a Risk-Pricing bubble.

The End of the Housing Bubble

• Housing Got Over-Built and Over-Priced.

• The Recent Decline in Home Construction was severe, but did not by itself cause a Recession.

• However, the Ongoing Decline in Home Prices will Continue and its Effects Are Severe Enough to Cause a Recession.

Total Housing Starts

0

500

1000

1500

2000

2500

1/1/19

90

1/1/19

91

1/1/19

92

1/1/19

93

1/1/19

94

1/1/19

95

1/1/19

96

1/1/19

97

1/1/19

98

1/1/19

99

1/1/20

00

1/1/20

01

1/1/20

02

1/1/20

03

1/1/20

04

1/1/20

05

1/1/20

06

1/1/20

07

1/1/20

08

1/1/20

09

thou

sand

s

Monthly12 mo. avg

Single Family Housing Starts

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

thou

sand

s

Monthly

Wisconsin Building Permits

0

5000

10000

15000

20000

25000

30000

1994

-Jan

1995

-Jan

1996

-Jan

1997

-Jan

1998

-Jan

1999

-Jan

2000

-Jan

2001

-Jan

2002

-Jan

2003

-Jan

2004

-Jan

2005

-Jan

2006

-Jan

2007

-Jan

2008

-Jan

2009

-Jan

Monthly12 mo Total

Private Investment: Residential Structures

140180220260300340380420460500540580620660

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2000

Dol

lars

(In

Bill

ions

)

Residential Construction: Percent of GDP

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%19

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

Perc

ent o

f Nom

inal

GD

P

Residential Construction: Percent of GDP

2%

3%

4%

5%

6%

7%

8%19

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

Perc

ent o

f Nom

inal

GD

P

Residential Construction: Percent Growth

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

198

5 1

986

198

7 1

988

198

9 1

990

199

119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

Four

Qua

rter

Per

cent

Gro

wth

Construction: Percentage Growth in Employment

-14.0%

-10.0%

-6.0%

-2.0%

2.0%

6.0%

10.0%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Gro

wth

in L

ast 1

2 M

onth

s

US WI

Stock of Over-Built Houses(Assuming 1.6m./yr. is norm)

-200

0

200

400

600

800

1000

1200

1400

Jan-02Jan-03

Jan-04Jan-05

Jan-06Jan-07

Jan-08Jan-09

Thou

sand

s

NAHB Index

0

10

20

30

40

50

60

70

80

90

Jan-8

5

Jan-8

7

Jan-8

9

Jan-9

1

Jan-9

3

Jan-9

5

Jan-9

7

Jan-9

9

Jan-0

1

Jan-0

3

Jan-0

5

Jan-0

7

Jan-0

9

The Decline in Home Prices

• The Decline in Home Prices is not over, but there are signs of stabilization.

• Home prices are local. Prices in many localities never declined. Prices in a few others are starting to stabilize.

• Declines remain severe in Florida, the Central Valley (CA) and some cities, i.e. Las Vegas.

A Century of Real House Prices(Shiller Spliced Indexes of House Price/CPI)

0

50

100

150

200

250

Shill

er S

plic

ed In

dice

s

Shiller HomePrice Deflated by Personal Income per Capita

0

1

2

3

4

5

6

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Average Value of New Houses in Wisconsin

0

50,000

100,000

150,000

200,000

250,000

1994

-Jan

1995

-Jan

1996

-Jan

1997

-Jan

1998

-Jan

1999

-Jan

2000

-Jan

2001

-Jan

2002

-Jan

2003

-Jan

2004

-Jan

2005

-Jan

2006

-Jan

2007

-Jan

2008

-Jan

2009

-Jan

Monthly12 Mo Avg

House Price Declines have Also Popped a Risk-Pricing Bubble

The Popping of the Risk-Pricing Bubble has Led to a Tightening for

Credit of All Kinds

The Tighter Credit and the Decline in Home Values have caused a Decline

in Consumer Purchases.

The Credit Crunch

• Defaulting Mortgages and the Prospect of Further Defaults Have Led to huge Losses by the Big Banks.

• These Losses have Reduced Bank Capital to Levels that Preclude them from lending.

• The Seizing up of credit is a major cause of the Recession we are in.

Federal Reserve Policy: Fed Funds Rate

0

2

4

6

8

10

12

Jan-

88Ja

n-89

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Perc

ent

Interest Rates on Treasuries

0

2

4

6

8

10Ja

n-86

Jan-

87Ja

n-88

Jan-

89Ja

n-90

Jan-

91Ja

n-92

Jan-

93Ja

n-94

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09

Perc

ent

1 Year 10 Year

Yield Curve: Yield on 10 year Treasury minus Yield on 1 year Treasury

-4

-3

-2

-1

0

1

2

3

419

54

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Perc

enta

ge P

oint

s

2

3

4

5

6

7

8

9

10

11

12Ja

n-88

Jan-

89Ja

n-90

Jan-

91Ja

n-92

Jan-

93Ja

n-94

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09

10 Year Treasury Rate BAA Corporate Rate

Yield Spread: BAA Corporate Rate minus 10 Year Treasury Rate

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-

88Ja

n-89

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Rate on Conventional Mortgages

5%

6%

7%

8%

9%

10%

11%

12%Ja

n-86

Jan-

87Ja

n-88

Jan-

89Ja

n-90

Jan-

91Ja

n-92

Jan-

93Ja

n-94

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09

Rat

e

Personal Savings: Percent of Disposable Income

-2.0

0.0

2.0

4.0

6.0

8.0

10.019

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

Perc

ent

Household Net Worth Down 18% Household Net Worth

40000

45000

50000

55000

60000

65000B

illio

ns o

f Dol

lars

• The large drop in net worth is mainly due to a larger drop in assets than liabilities• This drop suggests a major drag on spending through the wealth effect for some time to come. Adding

to that will be the impulse to increase savings.• It’s important to point out that the aggregates are like means, and in no way describe the median

household. Holdings of financial assets, especially stocks, are heavily concentrated at the top end. In fact, the aggregate numbers correspond with a household roughly at the 95th percentile of the wealth distribution.

• Only about half of all households own any stock at all, and of those that do, average holdings are quite small. And only about 60% of households own their houses.

Consumer Expenditures on Durable Goods: Percent Growth (4Q)

-15%

-10%

-5%

0%

5%

10%

15%

20%92

-Q1

93-Q

1

94-Q

1

95-Q

1

96-Q

1

97-Q

1

98-Q

1

99-Q

1

00-Q

1

01-Q

1

02-Q

1

03-Q

1

04-Q

1

05-Q

1

06-Q

1

07-Q

1

08-0

1

09-0

1

Perc

ent G

row

th ($

2000

)

Light Truck and Auto Sales

0

5

10

15

20

25Ja

n-79

Jan-

81Ja

n-83

Jan-

85Ja

n-87

Jan-

89Ja

n-91

Jan-

93Ja

n-95

Jan-

97Ja

n-99

Jan-

01Ja

n-03

Jan-

05Ja

n-07

Jan-

09

Uni

ts S

old

(Mill

ions

)

Monthly Sales 3 mo. avg. 12 mo. avg

CPI: Used Cars

100

110

120

130

140

150

160

170

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Consumer Price Index

-1%0%1%2%3%4%5%6%7%19

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

12 m

onth

rate

All Items NonEnergy, NonFood

Private Investment: Business Inventory Accumulation

-150

-100

-50

0

50

100

15019

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

2000

Dol

lars

(In

Bill

ions

)

No Help Expected From the Rest of the Private Economy

• Business Investment is Declining

• Exports have Weakened. Weakness Abroad will Keep Exports from Growing

Private Investment: Non-Residential Structures

180

200

220

240

260

280

300

320

340

36019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2000

Dol

lars

(In

Bill

ions

)

Investment in Capital Equipment

200

300

400

500

600

700

800

900

1,000

1,100

1,20019

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

2000

Dol

lars

(In

Bill

ions

)

Business Equipment as a % of GDP

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%19

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

Perc

ent

Exports and Imports

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,00019

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

2000

Dol

lars

(In

Bill

ions

)

Exports Imports

Net Exports of Goods and Services

-700

-600

-500

-400

-300

-200

-100

019

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

2000

Dol

lars

(Bill

ions

)

Total Exports: Percent of GDP

7%

8%

9%

10%

11%

12%

13%

14%

15%19

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

Perc

ent o

f GD

P

Public Spending to the Rescue

• State and Local Governments can’t help because They must balance their Budgets.

• The Federal Government must fill the gap.

Government Expenditures: State and Local

500

600

700

800

900

1,000

1,100

1,200

1,300

1,40019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2000

Dol

lars

(In

Bill

ions

)

Government Expenditures: National Defense

250

300

350

400

450

500

550

60019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2000

Dol

lars

(In

Bill

ions

)

Government Expenditures: All Levels

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,20019

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

09

2000

Dol

lars

(In

Bill

ions

)

Economic Stimulus Package

Total of $787 billion in spending and tax cuts • $308 billion in appropriated spending• $269 billion in direct spending (refundable

portion of tax credits, unemployment benefits, Medicaid reimbursement to states, etc.)

• $211 billion in tax cuts

Source: Author 51

Financial Support(The “BAILOUTS”)

• Over $1 Trillion in Purchases of Financial Assets

• Commitments for Several Trillion More• Old troubled assets are included• Financial Support for New Private

Spending is About to be Emphasized

The Anatomy of a Recovery

1 House Prices Must Stop falling2 Consumers Can Then Increase Spending3 Credit Default Swaps Can Then be

Priced And Normal Banking Can Then Resume

4 Stock Prices Can Begin to Recover