The next recession will not be. The Great Recession. Damon Runberg, Economist Oregon Employment Department

Transcription

1 The next recession will not be The Great Recession Damon Runberg, Economist Oregon Employment Department

2 Why the fears?

3 Simplified Business Cycle Peak 2 consecutive quarters of GDP declines Wages Rise Job Losses Labor Market Tightens Job Growth Trough

4 We Economists aren t very good at forecasting recession Predicting bad news can be costly and unpopular But, bad news drives clicks Reliance on Trends

5 Some models better than others Lagging Indicators Leading Indicators Don t pay attention to any long-term forecasts that go beyond a year.

6 100+ Years of American Recessions 140 Expansions are trending longer Months since previous trough Jan-02 Jan-06 Jan-10 Jan-14 Jan-18 Jan-22 Jan-26 Jan-30 Jan-34 Jan-38 Jan-42 Jan-46 Jan-50 Jan-54 Jan-58 Jan-62 Jan-66 Jan-70 Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 Current expansion still ongoing Business Cycle Peak

7 Expansions don t die of old age The Post Hoc Argument: Recent expansions lasted just over 6 years before another recession began. Our current expansion has continued for more than 6 years, so a recession will happen soon.

8 However, most expansions end Unless you live in Australia 1) A shock 2) Significant policy error 3) Tightening monetary policy to slow inflation

9 What was the loose thread that caused the Great Recession? according to Mian and Sufi.

10 The economy unraveled when the debt thread was pulled 14.0 The Great Recession was preceded by a rapid rise in household debt 13.5 Household Debt as a Percent of Disposable Income Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 2012

11 Not surprisingly, people were buying houses 8.0 Mortgage debt became a larger share than all other debt combined % Debt as a Percent of Disposable Income

12 Turns out debt is pretty dangerous 14.0 Household debt had been growing for over 20 years 13.5 Household Debt as a Percent of Disposable Income Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 2012

13 The harshness of debt $100,000 house $80,000 mortgage $20,000 Homeowner equity What happens if there is a 20% drop in home prices?

14 What do you do if You have low net worth AND see your net worth decreased further? $1,300 You cut back on spending Durable Goods Peronsal Conumption (in Billions) $1,250 $1,200 $1,150 $1,100 $1,050 $1,000 Foreclosures began $950 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09

15 The housing crash was very localized

16 The Tennessee Example 1.2 Drop in consumer spending effected non-housing bubble areas Employment Data Indexed to January Car Dealerships Home price appreciation: +25% (California Auto ~60%) Manufacturing Household net worth dropped just 2% (much less than national average) 0.5 Jan 2005 Aug 2005 Mar 2006 Oct 2006 May 2007 Dec 2007 Jul 2008 Feb 2009 Sep 2009 Apr 2010 Nov 2010 Jun 2011 Jan 2012 Aug 2012

17 Debt, housing depreciation, spending cuts, then job losses Employment Indexed to Pre-Recession Peak Oregon (-8.5% of all non-farm jobs) United States (-6.3% of all non-farm jobs) Months Since Peak A worker laid off in a recession loses income equal to three times their annual pre-layoff earnings over the rest of their life. -Davis and Wachter

18 Why the next recession will (most likely) be different

19 Household debt remains at a 30 year low 14.0 Households are in a much safer place today 13.5 Household Debt as a Percent of Disposable Income Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q1 2016

20 No housing bubble 3,000 New housing permits remain relatively low 2,500 2,000 Thousands of Units 1,500 1,

21 Job growth is fueling today s expansion Index of economic activity relative to historic growth rates Sales, Orders, and Inventories Personal Consumption and Housing Employment and Unemployment Production and Income -0.5 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16

22 What about us in Oregon? $5,500 Spending is back to normal $4,500 United States Oregon Per Capita Durable Goods Spending $3,500 $2,500 $1,500 $500 -$

23 What about us in Oregon? 4,000 No looming housing boom 3,500 3,000 New Private Housing Permits 2,500 2,000 1,500 1,

24 What about us in Oregon? A more diverse industry base Health care and social assistance Professional and business services Leisure and hospitality Retail trade Transportation, warehousing, and utilities Wholesale trade Information Financial activities Construction Manufacturing - 20,000-10,000 10,000 20,000 30,000 40,000 50,000 60,000 Employment change since 2007

25 So, what? The economy is a risky place A recession will happen again That recession will not be great Keep an eye on out for loose threads

26 Questions? Damon Runberg