18/3/20: Past Recessions and COVID19 Crisis

As governments around the world are revising the expected duration of the extraordinary restrictive measures aimed at containing COVID19 pandemic, it is worth looking back at the history of past recessions by duration:

The chart above clearly shows that U.S. recessions (generally historically shallower and less prolonged than those in Europe) have been lengthy in duration, with only two recessions lasting < 8 months and only six lasting less than 10 months. The 1918-1919 recession was preceded by the Spanish Flu epidemic, but the recovery from the recession was also supported by the end of the WW1. Some more on the Spanish Flu pandemic effects on the economy can be found here: https://www.stlouisfed.org/~/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf.

The 1918-1919 recession was not an isolated incident, as it was followed closely by the twin recession of 1920-1921. The joint episodes lasted 25 months. Similarly, the 1980 and 1981 twin recessions should also be treated as a joint episode of 22 months duration. Adjusting for these, average recession has been lasting 15 months, not 13 months, with only four recession of duration < 10 months.

Should, as now expected, the Covid2019 pandemic cause a global recession, it is unlikely to be short-lived, implying that any fiscal and monetary supports required to ameliorate the crisis core effects will have to be in place for much longer than the 2-3 months currently implied by the crisis contagion and social distancing restriction.

3/7/19: Record Recovery: Duration and Perceptions

While last month the ongoing 'recovery' has clocked the longest duration of all recoveries in the U.S. history (see chart 1 below), there is a continued and sustained perception of this recovery as being somehow weak.

And, in fairness, based on real GDP growth during the modern business cycles (next chart), current expansion is hardly impressive:

However, public perceptions should really be more closely following personal disposal income dynamics than the aggregate economic output growth. So here is a chart plotting evolution of the real disposable income per capita through business cycles:

By disposable income metrics, here is what matters:

1. The Great Recession was horrific in terms of duration and depth of declines in personal disposable income.
2. The recovery has been extremely volatile over the first 7 years.
3. It took 22 quarters for personal disposable income to recover to the levels seen in the third quarter of the recovery.

So what matters to the public perception of the recovery in the current cycle is the long-lasting memory of the collapse, laced with the negative perceptions lingering from the early years of the recovery.

To confirm this, look at the average rate of recovery in the real disposable income per quarter of the recovery cycle. The next two charts plot this metric, relative to the (a) full business cycle - from the start of the recession to the end of the recovery (next chart) and (b) recovery cycle alone - from the trough of the recession to the end of the recovery (second chart below):

So looking at the trough-to-peak part of the cycle (the expansion part of the cycle) alone implies we are experiencing the best recovery on modern record. But looking at the start-of-recession-to-end-of-recovery cycle, the current recovery period has been less than spectacular, ranking fourth in strength overall.

Which is, of course, to say that our negative perceptions of the recovery are anchored to our experience of the crisis. We are, after all, behavioral animals, rather than rational agents.

4/2/16: Smal v Large Cap Stocks: Recession Cycle Performance

Credit Suisse did an interesting exercise recently in a note to clients. They took U.S. equities indices for large cap (S&P500) and small cap (Russell 2000) stocks and computed an average downside to each index across all U.S. recessions from 1980 on and then to the upside from the post-recession trough. The episodes averaged over are: 1980, 1981-1982, 1990-1991, 2001, and 2007-2009. As a caution, there is no survivorship bias (index composition risk) adjustment to the resulting data.

So per CS: “Measuring the average peak-to-trough performance of the Russell 2000 and S&P 500 from one year before the start of each recession to the end of the downturn, the bank found that large caps were more resilient than small caps across the five slumps: the S&P 500 fell by an average of 32 percent, while the Russell 2000 dropped 37 percent. But it was a different story on the way back up. The Russell 2000 averaged returns of 86 percent from the start of each recession to one year after its end, while the S&P 500 posted returns of just 51 percent.”

So over the part of the cycle covered by CS, Russell 2000 was up, net, 17 percent, while S&P was up, net, only 3%.

4/7/2014: Q1 2014: GDP & GNP dynamics

In the previous posts I covered the revisions to our GDP and GNP introduced by the CSO and sectoral decomposition of GDP. The former sets out some caveats to reading into the new data and the latter shows that in Q1 2014, four out of five sectors of the economy posted increases in activity y/y. These are good numbers.

Now, let's consider GDP and GNP data at the aggregate levels.

First y/y comparatives based on Not Seasonally-Adjusted data:

• GDP in constant prices came in at EUR44.445 billion in Q1  2014, which marks an increase of 4.14% y/y and the reversal of Q4 2013 y/y decline of 1.15%. 6mo average rate of growth (y/y) in GDP is now at 1.49% and 12mo average is at 1.14%. Over the last 12 months through Q1 2014, GDP expanded by a cumulative 1.13% compared to 12 months through Q1 2013.
• Net Factor Income outflows from Ireland accelerated from EUR7.013 billion in Q1 2013 to EUR7.584 billion. Given the lack of global capes, this suggests that MNCs are booking more profit out of Ireland based on actual activity uplift here, rather than on transfers of previously booked profits. But that is a speculative conjecture. Still, rate of profits expatriation out of Ireland is lower in Q1 2014 than in Q1 2012, Q1 2011 and Q1 2010, which means that MNCs are still parking large amounts of retained profits here. When these are going to flow to overseas investment opportunities (e.g. if, say, Emerging Markets investment outlook improves in time, there will be bigger holes in irish national accounts).
• GNP in content prices stood at EUR36.861 billion in Q1 2014, up 3.35% y/y and broadly in line with the average growth rate over the last three quarters. This marks the third consecutive quarter of growth in GNP. Over the last 6 months, GNP expanded by 2.98% on average and cumulative growth over the last 12 months compared to same period a year before is 2.67%.

Two charts to illustrate:

The above clearly shows that the GDP has been trending flat between Q2-Q3 2008 and Q1 2014, while the uplift from the recession period trough in Q4 2009 has been much more anaemic than in any period between 1997 and 2007.

The good news is that in Q1 2014, rates of growth in both GDP and GNP were above their respective averages for post-Q3 2010 period. Bad news is that these are still below the Q1 2001-Q4 2007 averages.

GNP/GDP gap has worsened in Q1 2014 to 17.1% from 16.4% in Q1 2013. The same happened to the private sector GNP/GDP gap which increased from 18.3% in Q1 2013 to 19.1% in Q1 2014. This implies that official statistics, based on GDP figures more severely over-estimate actual economic activity in Ireland in Q1 this year, compared to Q1 last.

Chart to illustrate:

Switching to Seasonally-Adjusted data for q/q comparatives:

• GDP in constant prices terms grew by 2.67% q/q in Q1 2014, reversing a 0.08% decline in Q4 2013 and marking the first quarter of expansion. 6mo average growth rate q/q in GDP is now at 1.30% and 12mo at 1.26%. 
• GNP in constant prices terms grew by 0.48% q/q in Q1 2014, a major slowdown on 2.24% growth in Q4 2013. Q1 2014 marked the third quarter of expansion, albeit at vastly slower rate of growth compared to both Q3 2013 and Q4 2013. 6mo average growth rate q/q in GNP is now at 1.36% and 12mo at 1.34%. 

Chart to illustrate:

Finally, let's re-time recessions post-revisions.

Red bars mark cases of consecutive two (or more) quarters of negative q/q growth in GDP and GNP:

16/1/2013: Some charts on US unemployment: Financial Crises v Recessions

Two absolutely fascinating charts showing just how different is the current Great Recession from the previous recessions and how the financial crises disruptions are much longer lasting structural in nature when it comes to unemployment than traditional recessions.

(Source: http://oregoneconomicanalysis.wordpress.com/2012/09/24/checking-in-on-financial-crises-recoveries/ )

First, financial crises:

And now, run-of-the-mill recessions:

And financial crises duration in terms of unemployment levels:

The above charts should really be a wake up call to the European 'leaders' still pretending that the recovery is only a matter of short time stroll through deficits reductions.

Here is a link to an excellent presentation (from April 2012, albeit) by the US Treasury on the crisis responses to-date, showing the complexity and the sheer magnitude of these responses. To anyone familiar with the EU response to the crisis - these amount at best to 1/10th of the scale/scope of the US responses.

Here's a telling comparative:

It is also telling to read the level of realism in the US Treasury's presentation as to the problems remaining in the economy that is virtually unparalleled with the reports from the EU and some National Governments (e.g. Ireland).

30/10/2012: Not all austerity is equal

August 2012 paper (link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2153486 ) "The Output Effect of Fiscal Consolidations by Alberto F. Alesina , Carlo A. Favero and Francesco Giavazzi published by CEPR (Discussion Paper No. DP9105) looked at "whether fiscal corrections cause large output losses." Italics are mine:

The authors "find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.

The difference cannot be explained by different monetary policies during the two types of adjustments. Studying the effects of multi-year fiscal plans rather than individual shifts in fiscal variables we make progress on question of anticipated versus unanticipated policy shifts: we find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogenous across countries, suggesting that the degree of persistence of fiscal corrections varies."

"Estimating the effects of fiscal plans, rather than individual fiscal shocks, we obtain much more precise estimates of tax and spending multipliers". And "the key result is that while expenditure-based adjustments are not recessionary, tax-based ones create deep and long lasting recessions." The reason for this that "the aggregate demand component which reflects more closely the difference in the response of output to ECB and [tax-based] adjustments is private investment. The confidence of investors proceeds with the economy and therefore recovers much sooner after a spending-based adjustment than after a tax-based one. ...These results are consistent with the descriptive statistics presented in Alesina and Ardagna (2012) who show that the fiscal stabilizations which have the mildest effect on output are those that are accompanied by a set of structural reforms which signal a "decisive" policy change. They [like the present study] do not find any difference in the monetary pol- icy stance between spending-based and tax-based adjustments, but mostly differences in the policy packages regarding supply side reforms and liberalizations."

20/1/2012: A Question for Keynesianistas

Keynes remarked that:


"The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions."


Sounds plausible. 


A question to Keinesianistas, then: Why on earth would you argue that for every recession in every country, there is only one solution that is fully anchored in one Aggregate Demand identity? And that - irrespective of the nature of the path an economy takes into a recession or its underlying causes, irrespective of the economic conditions at the onset of the recession?