8%
6%
4%
2%
0%
-2%
-4%
Kevin Christ
Associate Professor of Economics
Rose-Hulman Institute of Technology
“How’s it going?
An appraisal of the current economic recovery”
-6%
2010:1
2009:1
2008:1
2007:1
2006:1
2005:1
2004:1
2003:1
2002:1
-8%
Presentation to Terre Haute Rotary Club
Tuesday, January 25, 2011
2010:1
2009:1
2008:1
2007:1
2006:1
2005:1
2004:1
2003:1
2002:1
8%
6%
4%
2%
0%
-2%
-4%
-6%
Annual Growth Rate of GDP
-8%
Why Is the Recovery Proceeding So Slowly?
Percent Job Losses
Relative to Peak Employment Month
Comparing Post-War Recessions:
Percent Job Losses During Recession and Recovery
1948
1982
1990
Number of Months After Peak Employment
Source: http://www.calculatedriskblog.com
2001
Why the Unemployment Rate Is Likely to Still be 8% in December 2011
DURATE = 1.32 - .44DGDP
Early 1984
Why Is the Recovery Proceeding So Slowly?
Comparing Three Deep Post-War Recessions:
Recovery of Personal Consumption Expenditures
Annual Growth Rate
of Personal Consumption Expenditures
8%
6%
1982 – 1984
4%
2%
1974 – 1976
0%
2008 – 2010
-2%
Recession
Recovery
-4%
1
2
3
4
5
6
7
8
9
10
11
12
Quarters Since the Beginning of the Recession
Light dotted lines correspond to the 1990 and 2001 recessions, which were both relatively mild.
Why Is the Recovery Proceeding So Slowly?
Comparing Three Deep Post-War Recessions:
Recovery of Durable Goods Expenditures
Annual Growth Rate
of Durable Goods Expenditures
25%
20%
1982 – 1984
15%
1974 – 1976
10%
5%
0%
-5%
2008 – 2010
-10%
Recession
Recovery
-15%
1
2
3
4
5
6
7
8
9
10
11
12
Quarters Since the Beginning of the Recession
Light dotted lines correspond to the 1990 and 2001 recessions, which were both relatively mild.
What Started All of This Anyway?
140%
Household Debt as a Percent of Disposable Personal Income
Late Summer 2007
120%
100%
80%
60%
40%
20%
Mortgage Debt
Other Household Debt
2010:Q1
2005:Q1
2000:Q1
1995:Q1
1990:Q1
1985:Q1
1980:Q1
1975:Q1
1970:Q1
1965:Q1
1960:Q1
0%
What Started All of This Anyway?
House Prices: The Case-Shiller House Price Index
250
June/July 2006
200
150
100
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
0
1987
50
Why Didn’t Anyone See This Coming?
(Some Did)
"I believe we're going to have two years
of negative economic growth. The last
two recessions lasted only eight months
each ... This time around this is going to
be three times as long, three times as
deep. This is going to be the worst
recession the US has experienced since
the 1980s."
Nouriel Roubini
September 7, 2006
Why Didn’t Anyone See This Coming?
(Some Did)
August 25, 2006
OP-ED COLUMNIST
Housing Gets Ugly
By PAUL KRUGMAN
... Housing has been the main
engine of U.S. economic growth
over the past three years, and with
that engine now going into
reverse, it’s hard to see how we
can avoid a serious slowdown.
Why Didn’t Anyone See This Coming?
(Some Did)
August 8, 2005
OP-ED COLUMNIST
That Hissing Sound
By PAUL KRUGMAN
This is the way the bubble ends: not
with a pop, but with a hiss …
the news that the U.S. housing bubble
is over won't come in the form of
plunging prices; it will come in the
form of falling sales and rising
inventory, as sellers try to get prices
that buyers are no longer willing to
pay. And the process may already have
started … we're starting to hear a
hissing sound, as the air begins to leak
out of the bubble. And everyone
should be worried.
Why Didn’t Anyone See This Coming?
(Some Did)
“… the most important concern is
whether banks will be able to provide
liquidity to financial market so that if
the tail risk does materialize, financial
positions can be unwound and losses
allocated so that the consequences to
the real economy are minimized
… trends suggest that even though
there are far more participants today
able to absorb risk, the financial risks
that are being created by the system
are indeed greater."
Raghuram Rajan
Jackson Hole
August 26, 2005
A Debt Hangover?
Mian and Sufi, Federal Reserve Bank of San Francisco, January 18, 2011:
“Overall, the evidence strongly suggests that credit demand is weak because of an
overleveraged household sector. This view is supported by survey evidence that the main
worry of businesses is sales, not financing … The evidence is more consistent with the
view that problems related to household balance sheets and house prices are the primary
culprits of the weak economic recovery.”
2010:1
2005:1
2000:1
1995:1
1990:1
1985:1
1980:1
12%
1975:1
1970:1
Personal Savings as a Percent
of Personal Disposable Income
Why Are Things Different This Time?
A Dramatic Change in U.S. Saving Behavior
10%
8%
6%
4%
2%
0%
Scenes from a Crisis: January 28, 2009
“This crisis is attributable to a variety of factors and the major
ones are: inappropriate macroeconomic policies of some
economies and their unsustainable model of development
characterized by prolonged low savings and high
consumption; excessive expansion of financial institutions in
a blind pursuit of profit; lack of self-discipline among financial
institutions and rating agencies and the ensuing distortion of
risk information and asset pricing; and the failure of financial
supervision and regulation to keep up with financial
innovations, which allowed the risks of financial derivatives
to build and spread. As the saying goes, ‘A fall in the pit, a
gain in your wit,’ we must draw lessons from this crisis and
address its root causes. In other words, we must strike a
balance between savings and consumption, between
financial innovation and regulation, and between the
financial sector and real economy."
Chinese Premier Wen Jiabao at the World Economic Forum, Davos,
Switzerland,
January 28, 2009
The Global
Imbalances
Story
Raghuram Rajan, Fault Lines (2010), pages 203 – 204:
… the United States (and a few other rich industrial countries
like Spain and the United Kingdom) have been spending more
than they produce or earn and thus borrowing to finance the
difference. Poorer countries like China or Vietnam have been
doing the opposite …
This mutually beneficial but ultimately unsustainable
equilibrium has been disrupted by the financial crisis and the
subsequent downturn … Indebted U.S. households, weighed
down by houses that are worth less than mortgages they owe,
have started saving more …
Prudent macroeconomic management suggests that largedeficit countries should be more careful about spending and
save more. If the world economy is not to slow considerably,
the countries with trade surpluses will have to offset this shift
by spending more … the poorer but fast-growing developing
countries like China and Vietnam should gradually reduce their
emphasis on exports and promote domestic consumption.
Global Imbalances Tend to Correct Themselves –
But Not as Quickly as We Might Like
12%
China’s Current Account Surplus
as a Percent of GDP
10%
8%
6%
4%
2%
0%
-2%
-4%
2010
2008
2006
2004
2002
2000
1998
1996
1992
1990
1988
1986
1984
1982
-8%
1994
U.S. Current Account Deficit
as a Percent of GDP
-6%
State of the Union Address
Washington, D.C., January 25
Source: Congressional Budget Office