Déjà Vu All Over Again

There’s no denying that the pace of the recovery slowed in the second quarter, and a variety of more recent economic indicators suggests that it has continued to decelerate in the third quarter. The question is whether it is about to stabilize or whether it will move into reverse. Recent history suggests that it could be the former. The recessions in 1990-91 and 2001 were followed by very sluggish early recoveries, slower than the current recovery as measured by real (inflation-adjusted) gross domestic product. GDP bottomed out in the second quarter of 2009, and in the four quarters since then, it has risen 3.2 percent. During the same four-quarter span following the prior two troughs, GDP increased by 2.6 percent (1991-Q1 to 1992-Q1) and by 1.9 percent (2001-Q4 to 2002-Q4). Both of those earlier cycles raised doubts about the sustainability of the recovery. Although the 1990-91 recession ended in March 1991, voters were still so upset in November 1992 that they voted the incumbent president, George H.W. Bush, out of office. The term “jobless recovery” came into vogue during that period; GDP was growing, but job creation was anemic, and it didn’t feel like a recovery. (Sound familiar?) The 2001 recession, which ended in November of that year, nearly stalled in the second half of 2002, and payroll employment did not bottom out until August 2003, 21 months after the recession officially ended.  The difference between the past three recessions and earlier post-World War II recessions, which tended to be followed by more vigorous recoveries, is that the three most recent recessions were triggered by bubbles - commercial real estate overbuilding leading up to the 1990-91 recession, the dot-com mania leading up to the 2001 recession, and debt of all types (triggered by subprime residential mortgage debt) leading up to the recession that began in December 2007. Recessions that are triggered by bubbles - excessive, imprudent investments where the losses are magnified by leverage - lead to slower recoveries. The relative decline of unionized manufacturing jobs in the modern economy also plays a role. The current recovery cycle is different from its immediate predecessors in a number of ways, notably the very high unemployment rate and the average length of unemployment, which causes more hardship and dampens confidence. Nevertheless, the slightly better trajectory of real GDP in the current recovery offers some evidence that the economy will muddle through again this time.

Robert Bach
SVP, Chief Economist
Grubb & Ellis