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
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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
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9319
9419
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9719
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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
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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