The next recession will not be The Great Recession Damon Runberg, Economist Oregon Employment Department
Why the fears?
Simplified Business Cycle Peak 2 consecutive quarters of GDP declines Wages Rise Job Losses Labor Market Tightens Job Growth Trough
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
Some models better than others Lagging Indicators Leading Indicators Don t pay attention to any long-term forecasts that go beyond a year.
100+ Years of American Recessions 140 Expansions are trending longer Months since previous trough 120 100 80 60 40 88 20 0 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
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.
However, most expansions end Unless you live in Australia 1) A shock 2) Significant policy error 3) Tightening monetary policy to slow inflation
What was the loose thread that caused the Great Recession? according to Mian and Sufi.
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 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012
Not surprisingly, people were buying houses 8.0 Mortgage debt became a larger share than all other debt combined 7.5 7.2% Debt as a Percent of Disposable Income 7.0 6.5 6.0 5.5 5.0 4.5 4.0
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 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 Q1 1983 Q4 1983 Q3 1984 Q2 1985 Q1 1986 Q4 1986 Q3 1987 Q2 1988 Q1 1989 Q4 1989 Q3 1990 Q2 1991 Q1 1992 Q4 1992 Q3 1993 Q2 1994 Q1 1995 Q4 1995 Q3 1996 Q2 1997 Q1 1998 Q4 1998 Q3 1999 Q2 2000 Q1 2001 Q4 2001 Q3 2002 Q2 2003 Q1 2004 Q4 2004 Q3 2005 Q2 2006 Q1 2007 Q4 2007 Q3 2008 Q2 2009 Q1 2010 Q4 2010 Q3 2011 Q2 2012
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?
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
The housing crash was very localized
The Tennessee Example 1.2 Drop in consumer spending effected non-housing bubble areas Employment Data Indexed to January 2005 1.1 1.0 0.9 0.8 0.7 0.6 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
Debt, housing depreciation, spending cuts, then job losses 1.02 1.00 Employment Indexed to Pre-Recession Peak 0.98 0.96 0.94 0.92 0.90 Oregon (-8.5% of all non-farm jobs) United States (-6.3% of all non-farm jobs) 0.88 0.86 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 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
Why the next recession will (most likely) be different
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 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 Q1 1983 Q1 1984 Q1 1985 Q1 1986 Q1 1987 Q1 1988 Q1 1989 Q1 1990 Q1 1991 Q1 1992 Q1 1993 Q1 1994 Q1 1995 Q1 1996 Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016
No housing bubble 3,000 New housing permits remain relatively low 2,500 2,000 Thousands of Units 1,500 1,000 500 0 1960-01-01 1961-09-01 1963-05-01 1965-01-01 1966-09-01 1968-05-01 1970-01-01 1971-09-01 1973-05-01 1975-01-01 1976-09-01 1978-05-01 1980-01-01 1981-09-01 1983-05-01 1985-01-01 1986-09-01 1988-05-01 1990-01-01 1991-09-01 1993-05-01 1995-01-01 1996-09-01 1998-05-01 2000-01-01 2001-09-01 2003-05-01 2005-01-01 2006-09-01 2008-05-01 2010-01-01 2011-09-01 2013-05-01 2015-01-01 2016-09-01
Job growth is fueling today s expansion 0.5 0.4 Index of economic activity relative to historic growth rates 0.3 0.2 0.1 0.0-0.1-0.2-0.3-0.4 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
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 -$500 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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 1,000 500 0 1988-01-01 1988-11-01 1989-09-01 1990-07-01 1991-05-01 1992-03-01 1993-01-01 1993-11-01 1994-09-01 1995-07-01 1996-05-01 1997-03-01 1998-01-01 1998-11-01 1999-09-01 2000-07-01 2001-05-01 2002-03-01 2003-01-01 2003-11-01 2004-09-01 2005-07-01 2006-05-01 2007-03-01 2008-01-01 2008-11-01 2009-09-01 2010-07-01 2011-05-01 2012-03-01 2013-01-01 2013-11-01 2014-09-01 2015-07-01 2016-05-01
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
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
Questions? Damon Runberg damon.m.runberg@oregon.gov 541-706-0779