Saturday, January 24, 2009

It's Deja Vu All Over Again: 1992 vs. 2009

The July 1990 to March 1991 recession was one of the shortest in U.S. history (8 months according to the NBER) and relatively mild: the jobless rate averaged only 6.1% during the recession and reached a high of only 6.8% by the end of the recession (although it continued to rise after the recession ended, see chart above). I think there is a general consensus that the 1990-91 recession was nowhere near as severe as the three previous recessions of the 1970s and 1980s, and it's a fact that the 1973-75 and 1981-82 recessions were twice as long (16 months) as the 1990-91 recession. And yet, as a follow up to yesterday's CD post, here is what the media were reporting about the 1990-91 recession:

"In 1991 the average American expressed more pessimism about the future than at any time since the Great Depression."

"There is no question but this is the worst economic time since the Great Depression.”

"Sluggish economic growth this year will cap the worst three-year period centered on a recession since the Great Depression."

"Forecasts for a weak recovery in 1992 suggest the period since 1990 will be the worst for the economy since the Great Depression."

“.....the worst plunge since the Great Depression.”

"The banking industry has plunged to its lowest point since the Great Depression."

"This is the most severe economic dislocation we've had since the 1930s. Few are immune."

"Mr. Barry, a past president of the Chamber of Commerce, said 50 For Sale signs are just the tip of the iceberg, since many bank foreclosures and repossessions do not carry signs. "It's not a recession, it's a depression," he said."

“….with the US economy locked in a recession and more people out of work since the Great Depression.”

"....the worst (retail) sales period on record since the Great Depression."

"This recession is hitting white-collar workers more heavily than any since the Great Depression of the 1930s."


At 1/24/2009 11:59 AM, Blogger bix1951 said...

I wish the "Pessimist In Chief" would read your blog.
The White House needs to lighten up.

At 1/24/2009 2:15 PM, Blogger wcw said...

The employment/population ratio, at 61.0% in December, is already lower than it ever was at its worst in the 1991 recession, when it bottomed at 61.2% in December 1991. And I am willing to lay money -- real money, like 6 months salary -- that we have not seen the lows on that series for the current recession.

Anyone want to take me up on it?

At 1/24/2009 2:43 PM, Blogger Marcus said...

wcw, if you're so confident, go put your money where your mouth is on Intrade.

At 1/24/2009 2:50 PM, Blogger Mark J. Perry said...

wcw: I was going to respond, but Marcus beat me to it. There are about 20 different Intrade contracts (U.S. GDP growth rates, unemployment rates, recession, depression contracts, etc.) that would allow you to bet your pessimism. Why not bet some of your six months salary on Intrade, and announce specifically what those trades are?

At 1/24/2009 3:56 PM, Blogger Don said...

What also needs to be considered in context during this gloom & doom 1991 media fest is the fact that a Republican was in the Whitehouse. And, if the media could talk down the economy in the minds of the electorate, they could improve the possibility of removing him relatively soon.

At 1/24/2009 6:15 PM, Anonymous Anonymous said...

So what is the difference between this recession and the 90' recession?

You claim it is not the press, and that the similar unemployment data makes this downturn the same as the others.

So by your account, unemployment is the only indicator of economic contraction because it is easiest to compare data between two time periods. Are you actually comparing the same numbers for unemployment? The rules changed,for calculating unemployment, from 91' to today so your whole post would be comparing bananas to oranges, and thus would make this post as good as the media which you are demonizing.

I don't know about you, but I am a bit concerned when the banks are getting billions of dollars to remain solvent. I don't think this condition is reflected by any of your compared unemployment numbers.

Your argument is claptrap. Unemployment comparisons between 91' and today are not the same number, and even though you link to NBER data, this tenuous link
between any of your data sources does not refute any thing the press does says. All you do is offer a few charts, fallacious arguments and then blame the media.

At 1/24/2009 6:25 PM, Anonymous Dr. T said...

Quite honestly, I can't even remember the 1991 recession. It had no impact on my life.

For me, this recession is much worse than the one in 1991 due to the preceding stock price downturn and the housing downturn. Though the typical recession indicators show that this recession isn't too bad, you also have to consider the effects of the huge loss in personal and corporate wealth.

More individuals own stock than ever before, and it was frightening to watch retirement stock fund values fall by 40% in a year. The effect on corporations is greater, since many of them had planned to use their stock assets for expansion or renovation. The loss of value in defined benefit pension plan funds required companies to make larger contributions when business was down.

Given the above, I believe our current recession will have much greater adverse effects than the 1991 recession, and the recovery will be slower.

At 1/24/2009 9:24 PM, Blogger wcw said...

Marcus, MJP: have you two ever made money trading in your lives?

There is no Intrade contract listed on the employment-population ratio. There is one for unemployment rate, but these are not one-touch options. And that's to say nothing of the real problem: Intrade is so illiquid, it boggles the mind. Replicating a six-months-salary payoff if the employment-population ratio drops any further looks to be impossible.

But please, prove me wrong. I'll fill in your Form 6783 for you.

But if I'm not wrong, my offer stands: six months of salary (whichever party's is lower, say), even odds, that the employment-population ratio has not yet hit its lows for the current recession.

At 1/24/2009 10:36 PM, Blogger Mark J. Perry said...

wcw: There are 20 different Intrade contracts for the U.S. unemployment rate, take your pick. There are no contracts for the employment/population ratio because nobody really cares about that statistic. It can be influenced by factors like birth rates, death rates, life expectancy, demographic factors, number of retirees, and many demographic factors that have nothing to do with the labor market condition, or general economic conditions. You probably won't find anybody to bet against for a labor statistic that nobody pays attention to.

At 1/25/2009 9:03 AM, Anonymous Anonymous said...

There are no contracts for the employment/population ratio because nobody really cares about that statistic


The U3 unemployment rate is the arithmetical difference between the employment-population rate (EPR) and the labor force-participation (LFPR) rate.

A longitudinal chart of the EPR and LFPR is here.

At 1/25/2009 2:55 PM, Blogger wcw said...

MJP, I take it the answer to my question above is "no." You'll forgive me if it is yes, and the following insults your experience.

Say I think emp/pop is going down, and want to make $50k on it. I could bet you $50k. We both put cash in escrow, and when it goes down another tick, et voila, I get my $50k back and your $50k to boot. Yummy.

I could open an account on Intrade. I'd hope against hope that labor force-participation stays constant, and buy unemployment contracts. But which? I just want to bet on things going a tick higher. So I would seem to be stuck with the 12/09 >7.25% contract. It last traded at 85. The >7.00% contract, now in-the-money (remember, these aren't actually futures contracts, they're binary options) is at 90. So let's guess that the next tick up in unemployment puts me at 90.

The multiplier on Intrade is $0.1; that 85 contract pays off at $10 if it finishes in the money. So, to make $50k, I need to buy 500,000 ($50k / $0.1) contracts -- roughly ten times as many as have ever traded for any Intrade contract, and roughtly 500 times as many as have ever traded for all Intrade 2009 unemployment-rate contracts.

Long story short, when you and Marcus told me to put my money where my mouth was on Intrade, you were suggesting I stick my head up my ass to check out the view. It probably made you feel good to type it, but that was the beginning and end of that suggestion's utility.

My offer stands -- six months salary, whichever of ours is smaller, on emp/pop going below 61.0 before whatever month the NBER eventually declares as this recession's trough. I have it in cash to put in escrow.

At 1/25/2009 4:46 PM, Blogger Rick Ballard said...

on emp/pop going below 61.0 before whatever month the NBER eventually declares as this recession's trough.

Sucker bet. The imbalance between retiring Boomers and the cohort entering the workforce is a demographic anomaly having little to do with the state of the economy. The BLS 10 year labor force growth projections have been cut from 1.2% to .08% to account for the anomaly. The ratio has to drop due to the exit/entrance imbalance because the parameters include people in retirement.

That's also why President Obumbles can't quite figure out how many jobs to promise - he started at 5 million but at least one of his advisers tipped him off that the BLS was only estimating 2.5 - 3 million over the two year period. He chopped his estimate afterward.

At 1/26/2009 12:43 PM, Anonymous Anonymous said...

Rickie, you're back!

A suckers bet. Well I guess that you are right, Rickie. The lead edge of the boomers (1946 cohort) will be part timers as Walmart greeters as their net worth (equities + homes) collapsed.

That means that the employment-population ratio should stabilize or rise as the 1947 and subsequent cohorts compete for the same positions.

That is not what you really mean, is it, Rickie?


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