Two indicators of the severity of the current recession, depth and duration, worsened in the past month.
The depth of the decline in inflation-adjusted Gross Domestic
Product in the fourth quarter of 2008 was revised by the U.S. Bureau of
Economic Analysis from a fall of 3.8 percent to minus 6.2 percent. The
economy has not experienced a quarterly dip of this magnitude since the
first quarter of 1982, when GDP fell by 6.4 percent. (For those who may
be wondering, the largest one-quarter decrease in real GDP in the
postwar period was recorded in the first quarter of 1958, at -10.4
The consensus from most observers (including Wall Street analysts, corporate economists, and even Ben Bernanke as reported on 60 Minutes) is that the recession will be measured in quarters, not years, but it will be the worst downturn since the Great Depression.
The duration of the recession that started in December of 2007 is
increasingly likely to reach eight quarters or 24 months, surpassing
the longest post war recessions of 16 months that began in 1974 and
1981. The 16 month milestone will be reached in April, with no relief
in sight until the second half of the year.
The W.P. Carey School's national Round Number Forecast now projects that GDP will fall by 3.0 percent in 2009 (see table at Economy@W. P. Carey),
exceeding the previous GDP low-water mark of a 1.9 percent decrease in
1982. GDP in the current quarter will fall by 5.0 percent, followed by
another decrease of 2.0 percent in the second quarter. In the second
half of 2009, consumer spending is expected to show modest gains that
pull GDP into the positive growth range.
The W. P. Carey School forecast for 2010 calls for an increase of
real GDP of 2.0 percent. The current consensus among the approximately
50 corporate economists that contribute to Blue Chip Economic Indicators
(Aspen Publishers, New York City) is that real GDP will grow by 1.9
percent in 2010. Twenty-six of the Blue Chip contributors expect GDP to
increase by 2.0 percent or more, and only one projects that GDP will
decline in 2010.
Business spending on plant and equipment is forecast to decline by
15 percent in 2009, after falling by 3.0 percent last year. In the face
of dwindling domestic sales, decreasing profits, excess capacity, and
weak exports, there is little justification for expansion of capital
spending this year. Nonresidential building -- such as retail and
office space, warehouses, and industrial facilities -- grew at a
double-digit pace earlier in 2008, but will be afflicted by weak
consumer demand for goods and services, falling employment, and tight
credit markets. Spending on nonresidential structures is expected to
fall through 2010, creating a drag on GDP.
Although home prices are expected to continue to fall by still more
in 2009, residential construction activity will hit bottom at the end
of the year and provide a positive boost to GDP growth going in to 2010.
U.S. exports will continue to decrease this year and next. This
contraction is global in its scope, with world GDP expected to dip by
as much as 2.0 percent this year, the first such worldwide output
decrease in decades. GDP for Europe and the U.K. will likely fall by
more than 2 percent, and the Japanese economy is expected to be down by
more than 4 percent. Even China is not expected to achieve its target
growth rate of 8 percent.
U.S. analysts are looking to government spending via the stimulus
package to boost the nation's real economy, creating jobs and restoring
confidence, but the effects may not be felt for several months. As time
passes and the recession grows deeper and longer, there is growing
concern that the stimulus package may be too small.
Moreover, innovative financial programs to get credit flowing have
not yet had a completely satisfactory impact, as credit remains tight,
lenders are wary of risk, and the system still sags under shelves full
of toxic assets. Some observers have calculated that recapitalization
of the banks may ultimately require funding approaching 25 percent of
GDP or upwards of $4 trillion.
While hundreds of billions have been allocated for various lending
facilities and troubled asset relief, it may be that, just as the
stimulus package is somewhat undersized to get the job done, we may
need several more variations and enhancements of TARP before the
economy achieves the 4 percent real GDP growth projected by the Obama
administration in 2011 and beyond (as set out by the Office of
Management and Budget, February, 2009).