Checking in on Financial Crises Recoveries

FTA 2012

Josh Lehner, Oregon Office of Economic Analysis

The views expressed here are not necessarily those of the Office of Economic Analysis or the State of Oregon

Peak

1 2 3 4 5 6 7-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

U.S. Recession Employment Loss

1948 1953 1957 1960

1969 1973 1980 1981

1990 2001 2007

No. of Years from NBER Peak

% f

rom

NB

ER

Pe

ak

Great Recession / Little Depression

Data through August, 20122

• Financial Crises Precursors:– Markedly rising asset

prices– Slowing real economic

activity– Large current account

deficits– Sustained debt buildup

• Public or private

3

Main Findings

Financial Crises FactsU.S. Avg

(‘81, ‘90, ‘01)Historical Average

Real Housing Prices -5.7% -35.5%

Real Equity Prices -29.5% -55.9%

Unemployment Rate +3.2% +7.0%

Real GDP per Capita -2.3% -9.3%

Real Government Debt 27.5% 86.0%

Current U.S. Cycle

-42.4%

-53.4%

+5.7%

-6.4%

78.0%

4

6.0

Note: While the financial crisis began in 2007, the S&P Case-Shiller peaked in mid-2006 and the calculation used here is based on this peak. The real homeprice trough was reached in February 2012. Sources: S&P/Case-Shiller Home Price Indices, BLS

42.4%

US, 2007

Note: To obtain inflation adjusted debt for a full three years the calculation dates chosen here are July 2008 – July 2011. Depending upon which dates one prefers, the percentage increase varies, e.g. Dec 2007 – Dec 2010 the increase is 73 percent.Source: BLS, U.S. Treasury – Debt Held by the Public

78.0%

Employment Losses

• Given the history of post WWII recessions in the US, the current level of job loss and slow recovery to date make the current cycle the clear outlier

• Juxtapose the current US cycle against the Big 5 financial crisis in the developed world plus the Great Depression and the picture looks a bit different

• That doesn’t necessarily mean the current outcome is acceptable

7

Peak 2 Years 4 Years 6 Years 8 Years 10 Years 12 Years 14 Years 16 Years 18 Years

-20%

-16%

-12%

-8%

-4%

0%

4%

Financial Crisis Employment Loss

Spain 1977 (13.0 Years) Norway 1987 (8.5 Years) Finland 1991 (17.3 Years) Sweden 1991 (17.8 Years) Japan 1992 (NA) U.S. 2007 (?)

Per

cen

t Jo

b L

oss

Fro

m P

eak

But We’ve Done Something Right

Note: Return to peak duration given in parenthesis. Japan’s employment essentially reached a plateau in 1992, the start date used here is 1992 Q1. Sources: OECD, BLS

More Context for Losses

-10

Years

-9 Y

ears

-8 Y

ears

-7 Y

ears

-6 Y

ears

-5 Y

ears

-4 Y

ears

-3 Y

ears

-2 Y

ears

-1 Y

ear

Peak

1 Yea

r

2 Yea

rs

3 Yea

rs

4 Yea

rs

5 Yea

rs

6 Yea

rs

7 Yea

rs

8 Yea

rs

9 Yea

rs

10 Y

ears

80

85

90

95

100

105

110

Financial Crises Employment, Peak = 100

Finland

Japan

Norway

Spain

Sweden

U.S

9

What Exactly is Different This Time?

• “We have put a much higher floor on the initial contraction.”

- Carmen Reinhart via Ezra Klein, Oct 15th 2012

• Monetary and Fiscal Policy– Coordinated, global response

10

Monetary Policy

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-120

1

2

3

4

5

6

7

8

Central Bank Interest Rates

G7 Average

China

U.S. (FED)

EU (ECB)

11

Monetary Policy (Cont)

Source: Federal Reserve Bank of Atlanta

Monetary Policy (Cont)

Source: Federal Reserve Bank of Atlanta

Fiscal Policy

Austra

liaBra

zil

Canad

aChin

a

Franc

e

Germ

any

Italy

Japa

n

Korea

Mex

icoSpa

inU.K

.U.S

.0%

1%

2%

3%

4%

5%

6%

7%

Economic Stimulus as Share of 2008 GDP

Spending in 2010+

Spending in 2009

Source: Brookings, March 2009 based on IMF and Brookings’ author’s calculations 14

Conclusion

• The U.S. is experiencing your “garden-variety severe financial crisis.”

• However labor markets are performing better than previous episodes.

• Recovery path has been slow and steady.

15

16

Contact Information

Standard Contact:

(503) 378-4052

joshua.lehner@state.or.us

www.oregon.gov/das/oea

Social Media:

oregoneconomicanalysis.wordpress.com

@OR_EconAnalysis