The End of the Recession: A Prediction

by cactus

The End of the Recession: A Prediction
Back in March, I noted we were in recession, and that the recession was somewhat different from previous recessions in that it had not been preceded by a nice sized cut in the real money supply. Put another way – an error by the Fed wasn’t the immediate cause of this recession.
While the money supply is usually what precipitates a recession, the face of a recession, so to speak, are job losses. The economy slows down, less stuff gets made and bought, and people lose their jobs. Sometimes these job losses continue for a while after the recession ends (think the 2001 recession), but generally, the end of the recession and the end of the job losses tend to come at more or less the same point.
All this is prologue for me going out on a limb: I think the end of the recession is coming sooner rather than later. Specifically, I expect it before the second half of next year. I’m actually hedging my bets here – my gut tells me that it will come before the second quarter of next year.
Here’s why… I pulled monthly employment to population ratio figures from FRED, the invaluable database maintained by the Federal Reserve Bank of St. Louis. Data goes back to the murky depths of pre-history, specifically January 1948. Consider all ten previous recessions that have occurred since 1948 and before the current mess. If you look at the average reduction in the employment to population ratio from the high point within the twelve months preceding a recession and the end of a recession, you get a figure of 1.8. By contrast, the high point in the twelve months leading up the recession that began in December of 07 came in December of 06 – and employment to population ratio of 63.4%. November figures were at 61.4, so there’s already been a drop of 2, a bit higher than the average.
Now, the employment to population ratio happens to be higher now than ever before, so a drop of 2 is easier to achieve. However, the percentage drop of 3.15% also exceeds the average percentage drop (3.11%) observed in previous recessions.
Now, I wouldn’t be a good economist if I didn’t leave myself some ways to weasel out of my prediction, so here they go. First is that this assumes the current recession behaves a bit like previous recessions. As I noted back in March, this one seems to be different from the previous ones we’ve seen as it didn’t arise from the Fed inadvertently choking off the economy. If you ask me, the current situation is most similar to the 87 – 91 mess, which came when excessive financial deregulation led to the S&L crisis, which in turn only officially became a recession in Nov 90 and lasted through March of 91. To a large extent, even if it wasn’t all a recession, that mess went on for four years or so. Things are happening more quickly here.
Another issue is the difficulty in predicting the behavior of the big players, especially the Fed and the Federal Government. So far, as far as I can tell, they’ve just made things worse. Much worse. Both seem to be doing their best to ensure that the financial sector continues to be unstable by keeping the lousiest banks afloat – and who wants to deal with a lousy bank knowing that unless you’re one of the favored few, if there’s a bad to hold you’re the one whose gonna be doing the holding. And there’s no guarantee that the next President isn’t going to do some really stupid thingstoo.
Now, here’s the final issue… this is kinda numerology. After all, I don’t really have fundamental reasons why job losses won’t continue to accelerate for the next year. But that said, and maybe I’m missing something, I don’t see any particular reason why things will be so much worse than, say, 1973-1975. Sure, there are some structural changes that need to be made to the economy, but learning to live without Goldman’s financial crack pipe can’t possibly be as difficult as learning to live with OPEC squeezing our collective testicles.
BTW – the data and the analysis are here.

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