It's Official: We're in a Recession

Happy birthday, recession '08! You're now officially a year old!

That's right. The National Bureau of Economic Research has declared that the U.S. economy entered a recession in December of last year. Of course, that we're in a recession is hardly groundbreaking news these days. The debate now seems to hinge on talk about recession vs. depression.

The official, econ-geek, definition of a recession is typically two consecutive quarters of declines in gross domestic product. A depression is typically defined as a 10% decline in GDP. For most people, these definitions mean jack -- a recession is when it hurts, a depression is when it hurts real bad.

Still, the timing is pretty interesting. You'll recall December 2007 was just two months after the Dow Jones was setting all-time highs and companies like Chipotle (NYSE: CMG  ) and Google (Nasdaq: GOOG  ) were commanding stupendous earnings multiples. At the time, financial stocks like Citigroup (NYSE: C  ) , Merrill Lynch (NYSE: MER  ) , and E*Trade (Nasdaq: ETFC  ) had all coughed up staggering credit losses, but most investors acted like it'd just be a one-off event that would be contained. In hindsight, those tremors were obviously just a harbinger.

Why that's important is because markets are forward-looking creatures. In theory, they're supposed to extrapolate not just current data, but the discounted value of future data. What's obvious from looking at December 2007's market and comparing it with today's announcement is how stratospherically wrong that forward-looking judgment can be. Your move, efficient market theory.

At any rate, we're in a recession. That's reality. So what did past recessions look like? Here's a table showing every post-war recession and how long the slump lasted:

Recession

Duration

1948-1949

12 months

1953-1954

11 months

1957-1958

9 months

1960-1961

11 months

1969-1970

12 months

1973-1975

17 months

1980

7 months

1981-1982

17 months

1990-1991

9 months

2001

9 months

2007-?

12 months and counting

The average recession lasted something like 11 months, which would put our current situation at the long end of historical pullbacks. And check out this table. It shows that the official announcement of a recession typically comes toward the end, if not after, the actual occurrence

The obvious caveat is that what we're facing today is almost guaranteed to be worse than anything we've experienced in the recent past. A best-case scenario would probably be something akin to the recessions of the early '70s and early '80s, which would mean recovery starting sometime in the middle of next year. A worst-case scenario would be something closer to Japan's "lost decade," or even our own Great Depression, which debatably lasted from the late 1920s until the start of World War II roughly a decade later.

So when do you think we'll pull out of this recession? Tomorrow? Next year? Never? Take a second to weigh in via the Fool Poll below and throw in your thoughts in the comment section, if you feel so inclined.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Google and Chipotle Mexican Grill are Motley Fool Rule Breakers recommendations. The Motley Fool is investors writing for investors.


Read/Post Comments (11) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2008, at 4:01 PM, nerd1951 wrote:

    "A recession is when your brother-in-law loses his job. A depression is when you lose your job."

    -- Woody Alan

  • Report this Comment On December 01, 2008, at 4:44 PM, choicenotchance wrote:

    You and CNN paraphrasing from the same source or something...?

    http://money.cnn.com/2008/12/01/news/economy/recession/?post...

  • Report this Comment On December 01, 2008, at 4:44 PM, choicenotchance wrote:

    You= Morgan Housel, not nerd1951

  • Report this Comment On December 01, 2008, at 4:56 PM, TMFHousel wrote:

    Choicenotchance,

    The similarities are obvious because we're covering the same news event. To be technical, the CNN article you noted was published at 3:27pm. My article was published at 3:28pm. I'm flattered, but no, I can't type that fast :)

  • Report this Comment On December 01, 2008, at 5:08 PM, TMFHousel wrote:

    As for paraphrasing from the same source, I think the answer is pretty clear since our data doesn't even match. The NBER website was down this afternoon (probably being bombared with traffic) so the table data you're referring to came from this source (which itself is sourced from NBER)

    http://www.utahfoundation.org/pdf2/rr664summary.pdf

  • Report this Comment On December 01, 2008, at 5:08 PM, TimothyVR wrote:

    There is a big difference between a deep recession that lasts another year and a "lost decade". And isn't this already the end of a lost decade for stocks? The bubble was in housing, not in the stock market.

    The references to Japan are constant, but I rarely see any evidence to back it up. I am no expert on that period, but was the the Nikkei in 1989 really comparable to the US markets today? Was the real estate bubble comparable to ours?

  • Report this Comment On December 01, 2008, at 5:47 PM, louintexas wrote:

    interesting aspect or insight on this matter.. however i have to laugh there are a million predictions out here now and will continue to be so as well as many theorys but this i must say its the theorys and specualtion that lead us to play on another persons game that has driven this economy to the brink of disaster and will continue to do so.

    when people quit trying to use greed to mass proportions and drive the market upside down and backwards then and onlt then will we ever see a balance in our economy we have all been told many many things in the past and recent past about where we are going and how quick we wil get there! and this i can say in all honesty i predicted this nitemare cenario 8 years ago and i havent been wrong yet! and in time yes we will recover if you want to call it that but,not the way it was things that have transpired the past 28 months have set in motion a revelation of events that will cause a severe chain of events destined to take apart our system as we knew it and then and only then will be be bale to recontruct a pattern of less greed and more intelligent motives my suggestion is simple take what you have made set it aside and let things fall even the alleged bail outs haven;t worked nor wil they you cannot keep throwing taxes payers hard earned money after bad to repay some greedy rich sob that made a bad call in his or hers game plan then once it all falls and levels out then we can rebuild this cyle of disaster with everyone being on th esame level and the same playing field .

  • Report this Comment On December 02, 2008, at 2:24 AM, awallejr wrote:

    You mean we didn't know until now?

  • Report this Comment On December 02, 2008, at 7:46 AM, cmorr504 wrote:

    do persons who have strokes make full recoveries?

  • Report this Comment On December 02, 2008, at 10:24 AM, catoismymotor wrote:

    Surprise, surprise! I am going to have a heart attack and die from this surprise.

  • Report this Comment On December 07, 2008, at 7:25 PM, joseroncal wrote:

    Ok I get it; NOW we are in a Recession!

    The whole world has been waiting for two quarters of negative GDP growth to come and go before anyone would technically and officially declare the recession. However, once again the National Bureau of Economic Research (NBER) comprised of scholars, Nobel Prize winners in economics, and hundreds of learned university professors have finally conducted enough empirical research, developed enough statistical measurements, and made enough economic estimates to have concluded that hey, guess what, we are, indeed, in a recession.

    Excuse me, but I could have saved them a lot of trouble. For anyone paying attention, it would have been clear that we’ve been on the road to recession since December 2007. But it’s typical for official recession announcements to get released just as we are about to hit bottom, or even when the economic cycle is actually beginning to reverse itself into recovery mode. In other words, these reports are USELESS. You might as well close the barn door after the. . .well, you know.

    These announcements are not just old news, they’re an insult to the intelligence of consumers. It’s not as if we haven’t noticed that we’ve been living in a world that’s every bit as uncertain as it was after the 1930s.

    If we’d kept track of the following events and tied them all together, we would have known that something catastrophic was coming.

    • The credit-induced mess really began when interest rates were slashed between 2001 and 2004. Easy credit led to over-borrowing and everybody was getting in over their heads. But interest rates started to climb. In 2004 rates peaked at 5.25% and that’s when the stuff started to hit the fan.

    • In 2006 the blow-up started to unfold—all those low-interest, adjustable-rate mortgages began resetting. It brought dramatically higher interest rates and increased monthly mortgage payments. It was not uncommon to see a $1,500 monthly payment balloon to two or three times that amount—way beyond the budget for many unqualified buyers.

    • That led to a 42% increase in mortgage foreclosures between 2005 and 2006—according to Realty Trac. By 2007, nationwide foreclosure rates were 0.75% compared to the previous year. An early victim was NovaStar Financial, which reported a 7% jump in delinquencies in 2006 compared to a 2% rise in 2005. By January 2008, their share price had dropped to $1, down from $150 in May 2006. For the first quarter of 2008, foreclosure filings, according to the Realty Trac index, were 112% higher compared to the same period during 2007.

    • During the first quarter of 2008 Robert Shiller, the famous Yale University economist and economic author, warned that home prices could drop by over 30%—a precipitous drop not seen since the Great Depression.

    • Meantime, the cracks in the central core of the financial system in the U.S. began to reverberate across the entire globe.

    • On July 9, 2007 the Dow hit an all time record, surpassing the 14,000 mark. But two months later, it had slid 8% to 12, 845. The aggressive actions by the Fed triggered a fragile and short-lived recovery.

    • After October 2007, the sub-prime mess was getting messier. Major financial institutions kept on reporting billions in losses, and the economy was flirting with recession.

    • By March 10, 2008, the blue chip benchmark of the U.S. industrial might, sank to 11,740, a 17% drop from a high reached in October. The biggest investor decline in eight decades has sent investors fleeing to U.S. Government instruments, bank deposits and other cash funds

    • From mid July to August of 2008, just about every financial market in both developed and emerging countries had registered double-digit losses.

    • In October 2008, U.S Mutual funds were hit hard by record investor withdrawals as $127 billion were moved to the safety of treasury and cash. Balances fell from a May total of $12.3 trillion peak to $9.6 trillion by the end of October.

    • SP 500 index slumped nearly 41% YTD—its worst performance since 1931, the MSCI World Index has dropped 47%, the average diversified U.S. equity fund has declined 48% this year through November 21—according to Morningstar—and the average non-U.S. fund has plunged 54%.

    • 1.2 million jobs have been cut in the last three months with 533,000 jobs lost in November alone, according to labor statistics—the biggest cut in more than 30 years—bringing the unemployment rate to 6.7%.

    As we’ve been reporting on financialspeculation, Bear Stearns and Lehman Bros. are kaput, AIG was rescued, many banks failed, well-known companies have gone bankrupt, millions of small business are closing shop, and the government’s $700b bailout has yet to unlock the credit markets. Then there was Citigroup and now the auto industry.

    It’s a disaster of epic proportions and there’s still more waiting in the wings—the unraveling of commercial real estate and the explosion of credit card debt and the defaults that are sure to follow. It is true that the most, if not all, economies from the U.S. to China to Spain and Argentina have provided stimulus packages, but it appears that we are in the midst of a prolong recession. How do we know? Not because the NBER tells us so.

    Actions taken to prevent deflation instead of inflation, to ignite economic activity and reduce the cost of access to credit, have thus far been fruitless. Meanwhile, the housing market continues to slide, GDP is dropping, consumers are not spending, the financial markets are in disarray and we have a U.S. team of economic fixer-uppers that keep tripping and stumbling into walls. Now we are holding our breath waiting to see what will shake out from the failing/flailing auto industry.

    If we are going to survive this, somebody had better come up with a workable plan—and fast! A plan that provides clear transparency, open communication and fewer surprises.

    On the other hand, who knows? We might actually be in the recovery period . . . but of course we’ll have to wait until the NERB formally announces it . . . sometime in 2010.

    I would highly recommend you read a great new book called "The Big Gamble" by Jose Roncal and Jose Abbo as they delve and provide great insight on the recession and economic crisis

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