US Economy Speeds to Longest Collapse Since 1945

Even Grand Swami Google Has No Answer- How Long the Contraction?

Apr 15, 2009

The US economy has been in recession for 16 months, a slide likely in three months to become the longest recession since the Great Depression of the 1930s.

Especially problematic is the possibility the US is caught in one of those crippling super cycles that some economists believe industrial societies encounter every 50 or 60 years. This writer discussed that possibility in "Super Business Cycle Threatens Obama's Team," a recent Suite101 article.

To business managers and investors, guessing the status of the current business cycle in the US market-driven economy is like racing a Ferrari Enzo, while looking through the rear view mirror. The driver can scan what is whooshing by; but, on a stormy night could miss the "Bridge out Ahead" sign. Crashing through a barricade into a river of red ink might be the consequence.

National Bureau of Economic Research Defines US Business Cycles

The National Bureau of Economic Research (NBER) establishes the road signs or reference points for business cycles in the US. That organization is a non-profit, blue ribbon group of economists who operate independently, in setting the dates of peaks, troughs and interim stages of economic activity.

For users of NBER business cycle research, life can be exasperating. Before critical points of a cycle are established, a manager often misjudges what phase s/he is operating in. NBER's pronouncements, which switch from contraction to expansion or vice versa, are issued like Delphic oracles--several months after the turning points are established.

Professional managers, who expend either internal funds or borrowed money in order to take advantage of assumed continuation of economic expansion, often suffer dire results when the economy has already moved away from the condition on which those decisions were based. The rear view mirror was misleading; perhaps the blurred receding scenery showed faux business health, when in reality the scene had changed from expansion to contraction.

US Economy in Eleventh Business Cycle Since 1945

NBER business cycle analyses include data beginning in 1854. In that span, contractions have become shorter by nearly 10 months on average and expansions longer by approximately 25 months. That's the good news! The elongation of the cycles provides some succor to those who misjudge a current one, for the increased time enables them to correct their positions.

The United States is in the contraction stage of its 11th business cycle since 1945. The end of the last expansion occurred in December 2007, although the NBER did not call it until December 1, 2008. That upturn represented an expansion of 73 months, fifth longest on record.

Federal Help Will Prove Pivotal to a Solution

The question now is how long the economy will stay in contraction, and then begin a recovery. Estimates range from one to three years, with some doomsday pundits saying five years or longer. The effectiveness of the $1.5 trillion combination of the TARP rescue for financial companies and the economic stimulus package will prove pivotal toward a solution.

The economy is in its 16th month of contraction, already having shrunk as long as any business cycle since the years around the Great Depression, when a contraction of 18 months occurred in 1921 and another 43 months in 1934. In three months, it is almost a bullet-proof guarantee the current contraction will be longer than any since 1945, unless NBER revises certain data.

Magnitude of Changes Is Omitted from Business Cycle Analysis

What is missing in NBER's published analysis is the amplitude of contractions and expansions. An expansion of only a few months can be more powerful than one twice as long, so setting durations of business cycles is not the whole story. Nevertheless, any long decline in business activity is serous; it can feed on itself, and diminish production and consumption faster as time passes.

NBER defines a recession as a significant decline in economic activity spread across the economy, lasting several months. These changes are normally reflected in such data as real GDP, real income, employment, industrial production, and wholesale/retail sales. For more delineation, see the announcement from the NBER's Business Cycle Dating Committee of December 12, 2008.

Although the current business cycle shows signs of becoming especially jolting to the American economy and, therefore, the rest of the world, colossal contra measures are at work. At least this is so in the US. These are producing "glimmers" of hope, to use President Obama's expression. The administration's massive bailout and stimulus monies are still in the US Treasury, for the most part; so, it is too early to forecast whether the business cycle of 2007 will moderate soon or become a cruel first cousin of the Great Depression.

The copyright of the article US Economy Speeds to Longest Collapse Since 1945 in Economics 101 is owned by Howard Bryan Bonham. Permission to republish US Economy Speeds to Longest Collapse Since 1945 in print or online must be granted by the author in writing.