The media, both TV and print, spend an inordinate amount of time explaining why the economy feels so bad. They interview hundreds of economists, strategists and government officials and trot out dozens of convoluted graphs and charts in a seemingly endless effort to come up an answer. We'll save you the time. It's actually quite simple and we can explain it with just one measurement----GDP. The current economic recovery, following a severe credit crisis, is by far the worst recovery since the Great Depression and is nothing like anything experienced in the post-war period. Here's how we compare the current recovery to the last eight expansions that lasted at least two years.
1) The second quarter of this year will be the eighth quarter of recovery since the bottom two years ago. If the annualized growth in GDP is reported anywhere near 1.5% as the consensus expects, the average quarterly growth for the eight quarters will be only 2.7%. In the last eight recoveries the average growth in the first eight quarters was 5.2%----quite a difference.
2) Of the last eight quarters of the previous recoveries----comprising 64 quarters in all---only 17 registered growth below 3%. In the current expansion five of the eight quarters fell below that level. It is therefore not true that such pauses in growth are typical of recoveries. And keep in mind that long-term GDP growth is about 3%, and more than that is necessary to reduce the unemployment rate.
3) So far we have just measured the growth rate from the bottom of the recession. The results are even worse when we compare current GDP to the peak of the last recovery. If second quarter GDP growth comes in at about 1.5%, total GDP will be only about 1% above the prior peak. On average at the end of the first eight quarters of a new expansion GDP was about 7.3% above the previous peak. Even the worst result of the last eight was 4.6% higher than it was before the recession started. Since most households measure their progress according to what they achieved in the past it is no wonder that the current malaise about the economy is weighing so heavily on the nation.
As we have said numerous times, economic growth following major credit crises is always slower than average, while recessions occur more often as consumers deleverage the vast amount of debt built up during the boom. In our view it will take years to work our way back to normal.
