With unemployment now at 9.5%, a 26 year high, most economists foresee double-digit unemployment before the end of the year with numbers continuing to rise into 2010 before beginning to creep back down. Of course, when you figure in all those who’ve given up looking for a job and those who’ve had to settle for low-paying part-time jobs, the real unemployment rate is closer to 16.5%.

That’s a lot of unemployment for the economy to absorb. Given that some jobs aren’t coming back (automotive for instance) and others will have to come back from new sources (Linens n’ Things, Circuit City, etc.), there is no reason to think any recovery will be quick or easy. I suspect economists will be regularly confounded and estimates will be regularly wrong.

The hope is that, all-and-all, the economy trends upwards. We can handle a few bumps, I’m not sure we’d fare well under a long depression.

Fox is attempting to position the show, called “Someone’s Gotta Go,” as less about reveling in other people’s misfortune and more about promoting employee empowerment. You see, the companies will disclose all employee’s salaries, thus allowing colleagues to make sure a deserving person isn’t terminated.

While I am a strong supporter of salary transparency in the workplace, that’s hardly the point behind the show. Fox is just trying to turn a very real and difficult problem into entertainment. What’s next? A reality program where transplant patients vote on who should get stuck at the end of the transplant list? Maybe we can set up some cameras outside a shelter and get homeless people to vote on which of them has to sleep outside once the shelter is full?

As to why any self-respecting small business owner would agree to be a part of Fox’s show, maybe the network is paying the businesses significant money (Fox hasn’t released details on any payments). Or maybe the business owners hope the exposure on national television will help elevate sales. If companies are in bad enough shape, I can see why they’d be willing to try anything.

But I’m not sure what Fox’s motivation is. The show makes the network look callous and, without being an expert in television programming, I’m hard pressed to identify what the intended audience is for a show that reminds viewers we’re in a recession and times are pretty crappy.

All said, it’s not that big of a deal. But I thought it worth a mention. I’m sure the marketplace will quickly determine whether or not Fox has made a mistake with this show.

This is Danielle Ivory, reporting from the American News Project and Alternet.

Back in February, in the House Financial Service Committee, when asked a question about the value of Citigroup’s assets, CEO Vikram Pandit provided a less-than-clear response: “It’s an extraordinarily difficult question.”

Click the video below to WATCH the exchange between Rep. Louis Gutierrez (D-IL) and Vikram Pandit.

Rob Weissman, director of the corporate watchdog group, Essential Action, and author of a new report called Sold Out: How Wall Street and Washington Betrayed America, said that, in addition to what Pandit said, there’s an additional factor that could fog the test results: off-the-book assets.

“If you don’t include the off-balance sheet assets in the stress test, then it’s not a legitimate stress test,” Weissman said. “It’s pretty plain that the off-balance-sheet operations are a central part of the story of why we don’t know what the banks own.” The Treasury Department declined to comment on whether they would take off-book-assets into account when running the stress tests.

Weissman says that recipients of bailout money, like Citigroup, Bank of America and JP Morgan, have been engaging in “fanciful accounting” of what they owe and what they own by relocating of their less-than-healthy assets off the books, in shadow corporations. Rep. Brad Sherman has described the process as, “apples on one balance sheet and oranges on another.”

According to RGE Monitor, off-balance-sheet operations have skyrocketed over the last 15 years. From 1992 to 2007, on-balance-sheet assets grew by 200 percent, while off-balance-sheet assets grew by 1,518 percent. In 2007, it was estimated that there was 15.9 times more money parked in off-balance-sheet operations than in on-the-book operations. Not all off-book assets are toxic. Some financial institutions might park assets off their books if they are planning, for instance, to sell them. However, in rough economic times, off-balance sheet accounting allows banks to veil their losses from investors, regulators, and even insiders.

“This turns out to be a really important benefit [for a bank] if it happens to be insolvent,” Weissman added. “And many believe that if you total Citigroup’s assets and liabilities, it is insolvent.”

As of July, Citigroup appeared to have the most off-book assets — an estimated $1.1 trillion. But they aren’t alone. As of July 2008, JP Morgan Chase & Co. had more than $400 billion off their books. Bank of America had $48.2 billion off the books before it bought Merrill Lynch. “If you start adding up all the potential exposures, it’s a huge number,” Sam Golden, former ombudsman for the U.S. Office of the Comptroller of the Currency, told Bloomberg. “The banks will say that it was disclosed. Investors are saying, ‘Yeah, but it was cryptic.’”

Disclosure rules for off-balance sheet operations are notably less strict than those for assets on the books. Neri Bukspan, chief accountant for Standard & Poor’s told Bloomberg, “A lot of information tends to disappear.”

The use of the off-balance-sheet assets was a core part of the Enron scandal, where they were able to wrap debt inside of debt, using obscure corporations, so no one could track what they owed and what they owned. After the Sarbanes-Oxley Act of 2002 was set in place, there were efforts to address the problems with off-book assets. But after heavy lobbying by two main trade groups, the Securities Industry and Financial Markets Association and the American Securitization Forum, banks were given special exemptions.

In September of 2008 as the financial crisis was coming into full view, the Senate Baking, Housing, and Urban Affairs Committee held a hearing, discussing off-balance sheet operations. Senator Jack Reed recalled Enron: “This phenomenon of moving assets off the balance sheets is eerily familiar. We recall back in the days of Enron that its schemes to manufacture false profits included special purpose entities that conducted transactions off-balance sheet. The goal was to avoid financial reporting. While no one is necessarily suggesting scandals of the Enron kind, we cannot fail to admit the irony. We are dealing with a similar problem yet again, only six years later.”

George P. Miller, Executive Director of the American Securitization Forum, said that moving assets off-book back on to the books would cause dangerous swelling of balance sheets. He added, “There are many other steps that the industry can and should undertake to promote broader and better transparency about risk exposures in these vehicles, whether they are on or off-balance sheet.”

But Donald Young, former member of the Financial Accounting Standards Board countered, “We just had an investment bank [Lehman Brothers] go bankrupt with a fair value balance sheet that showed it had plenty of assets and liabilities. And it almost seems like financial reporting is out of control and not trusted and not believed in. And I think what we do here has got to establish transparency. If the transparency is such that we’re going to bring out some bad news that wasn’t there before, that’s a risk. But I think the benefits of reestablishing confidence in the markets will overwhelm that.”

The Financial Accounting Standards Board (FASB) are revising the rules so some off-book assets will have to be reported on the books. However, the changes won’t be effective until January 2010 at the earliest. In March at a House Financial Services Subcommittee hearing, Rep. Sherman complained about this lag. He told the chairman of the FASB, Bob Herz, “If you guys can’t act quickly and logically, perhaps the regulatory accountants need to act and depart from what is a somewhat illogical and certainly slow process that you’ve got.”

In the meantime, in a recent letter to his employees, Pandit has said Citigroup is having its best quarter since 2007 and the bank had conducted its own internal stress tests with positive results. But Weissman says something doesn’t add up. “Either they’ve done a lot of due diligence in a short amount of time that they hadn’t done before, or the stories are incompatible.”

Crossposted at Alternet.

Brooks begins with the greed theory:

[T]he U.S. financial crisis is a bigger version of the crises that have afflicted emerging-market nations for decades. An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down. [The] remedy is clear. Smash the oligarchy. Nationalize the banks. Sell them off in medium-size pieces. Revise antitrust laws so they can’t get back together. Find ways to limit executive compensation. Permanently reduce the size and power of Wall Street.

Next, the stupidity theory:

[O]verconfident bankers didn’t know what they were doing. They thought they had these sophisticated tools to reduce risk. But when big events — like the rise of China — fundamentally altered the world economy, their tools were worse than useless.
…
The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.

One of my guiding principles is never blame on malice what can be blamed on stupidity. Obviously, greed played a significant role in the crisis, but I’ve never thought it was a form of coordinated greed so much as it was a lot of individual greed that blinded most of those in the financial industry to the massive flaws in the system. Simply put, greed led to stupidity which led to the crisis.

I know it’s satisfying to blame everything on the greedy elites — populist anger is the in thing. But here’s the problem: you can’t eradicate greed. Lots of people will always act out of self interest, no matter the system and no matter if they’re in the public or private spheres. We can’t say “the system caused greed, let’s jettison the system and create a new one” because every system is susceptible to greed. What we can say is that the system, as it exists now, propagates stupidity, so let’s reform the system.

Both the greed theory and the stupidity theory lead to the conclusion that change is necessary. But how we change is predicated on where we see the faults. In the long run, I think we’re better off trying to increase smart decision making than we are trying to create a system impervious to greed.

On February 1st, I noted in this post that, based on the data in hand and reliable projections, the recession seemed to be on track to become the worst downturn since the back-to-back recessions of 1980-82, but that it was a huge exaggeration — and unecessarily alarmist — to say that it’s the worst since the Great Depression.  It’s about  time to take another look.

 

On the same day President Obama signed the stimulus plan into law, the Federal Reserve issued a new economic forecast for 2009 and beyond.  The new outlook revised expectations for the economy downward since the Fed’s last forecast in October.

The key expectations of the Fed’s Open Market Committee (composed of the presidents of the Fed’s district banks and the members of its Board of Governors) now look like this:

With the weaker than expected data offsetting an upward revision to the assumption of the amount of forthcoming fiscal stimulus, the Fed now expects real gross domestic product to decline 0.5 percent to 1.3 percent in 2009.

In October, the Fed had predicted real GDP for 2009 in a range between 1.1 percent growth and a 0.2 percent decline.

That may not seem to be much of a difference but as real growth approaches zero, much less slides into negative territory, the effects can be tough.  The Fed now expects that drop in GDP to translate into unemployment reaching 8.5-8.8% in 2009 and continuing to rise in through the beginning of 2010 before edging down over the remainder of that year.  In its October forecast, the Fed still expected unemployment to top out at 7.1-7.6% in 2009.

The Fed also revealed a longer-term forecast for the economy that looks quite a bit better than it did the last time, in part due to the stimulus plan:

At the same time, estimates for real GDP growth in 2010 were upwardly revised, reflecting greater monetary and fiscal stimulus as well as the effects of more moderate oil prices and long-term interest rates.

The forecast for real GDP growth in 2010 was revised up to 2.5 to 3.3 percent from the previous forecast for growth of 2.3 to 3.2 percent.

Of course, the Fed’s forecast could be overly optimistic or just flat wrong.  Assuming that it’s generally in the right ballpark, though, what do the numbers tells us about the severity of this recession?  Are we experiencing the worst economy since the Great Depression, as we still hear every day, or something else?

Let’s look at the data and make some comparisons:

• GDP will shrink in 2009 by no more than 1.3% — maybe as little as 0.5%.   GDP increased in 2008 by 1.3% (after a rise of 2% in 2007), with the drop almost entirely attributable to a sharp plunge (3.8% on an annual basis) in the fourth quarter on the heels of the financial meltdown. 

If these predictions for GDP prove correct, it would be the worst decline in output since the 1.9% drop in the recession of 1981-82.

• Unemployment will rise to at least 8.5% during 2009 and could go above 9% in 2010 (remember, unemployment tends to lag other economic trends so it can still be increasing when activity begins to pick up). Some analysts (but not the Fed) think it will break 10%.

This level of unemployment and the long period of growing unemployment is similar to what occurred in the 1981-82 recession when the jobless rate was high by historical standards already in mid-1981 and rose to 10.8% at the end of 1982, the highest post-war level up to that time.

• The economy should bottom out sometime in 2009 (most other analysts believe that will occur around mid-year) and resume moderate growth during 2010.

Since the recession began in December 2007, that will make the duration of this one at least 18 months — longer than the 1981-82 recession, which lasted 16 months.

To sum up, in terms of GDP performance, unemployment and length of the downturn, we are in a severe, prolonged recession much like that of 1981-82.  

But this is not even come close to the experience of the Great Depression.  During the Depression, GDP nosedived month after month and year after year for a total decline of 27% during the harshest years, 1929-1933.  Unemployment was 15-25% for many years (and even higher in some years).  And the Depression lasted, depending on definitions, 7-8 years or even as many as 12-13 years.

We’re in a very bad spot — the worst in a generation and terrible if you’re one of the millions who has lost your job.  But we’ve been here before and recovered very nicely.

What do you think?  Post a comment.

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The vote was 61-37, and the procedural vote yesterday made this margin all but certain.

But this doesn’t mean it’s all sewn up. There’s still some debate to be had.

Politico digs into the specifics…

—Both House and Senate bills provide close to $87 billion in increased federal aid to help states meet their healthcare bills under Medicaid. But the House bill is much more tilted in favor of larger urban states, which have experienced the greatest increase in unemployment, while the Senate bill takes a more across-the-board approach that helps rural states.

—The Senate bill is more tilted toward tax breaks, including a $15,000 homebuyers’ tax credit that has proven more costly than first advertised and seems sure to face challenges in the negotiations. Senators also used their bill to address the perennial problem of protecting middle and upper middle income families from the alternative minimum tax –an issue that House fiscal conservatives argue should be dealt with separately.

—State and local aid is a major part of both bills, but the final round of cuts imposed by Republican moderates fell heavily on these accounts, including a $40 billion cut from the a state fiscal stabilization initiate favored by Obama.

–The school construction issue remains a ticklish one since it was a cut that both Collins and Specter insisted upon in the negotiations. At the White House Monday, Obama defended the proposal, saying it would generate construction jobs and be a long term commitment to education important to the economy, In fact, the New Deal saw like-minded investments in local schools. But Collins and Specter argued that in today’s environment, it represents a new federal role in public schools and ought to be debated outside of the stimulus debate.

My thought is that the current bill will simply not change much because the cuts that happened were necessary to move this legislation forward. If the states need more money in the future, I’m sure that’ll be something the administration will address, but for now the important part is getting some forward movement.

More as it develops…

The partisan stimulus bill that does not actually stimulate – that started as an $800B partisan grab bag of Democratic pet projects and pork in the heavily Democratic House of Representatives – that ballooned to $900B in the heavily Democratic Senate – has been apparently been “pared back” to $827B and will pass with the help of 2 or 3 Republican senators, knocking a fully interest loaded $1.1 trillion hole in the deficit. I guess that makes it bipartisan now.

This bill represents about half of the cost of the Iraq war to date, but committed in the first month of the new administration. Impressive. What we saw with this bill is a template for what we can expect from the “post-partisan” Obama administration over the next four years. Very public bi-partisan media photo-op eyewash, but hard-core ideological partisan bills steamrolled over the opposition in Congress. Sounds familiar. And why not? As Obama says “We won”. With his 52% mandate, there is no real reason to worry unduly about the valid concerns of the other 48%.

As this bill represents the new President’s first big partisan victory, it is instructive to review how Obama’s rhetoric on the bill has evolved.

Shortly after the election, while basking in the afterglow of the historic outcome, I – like many proud Americans – watched Steve Kroft interview the new first family on 60 Minutes. I was struck by one particular statement made by the president-elect, and even highlighted it in a post at the time:

What made the statement remarkable, is that it was patently, demonstrably, unequivocally false. No such consensus existed among economists – not then – not now.

If we were still in the heat of the presidential campaign, partisans might have seen fit to call it a blatant bald-faced lie. If Bush had uttered those words, it would have been cited as yet another example of his pathological inability to tell the truth, his isolation from dissenting views, and his disdain for the “reality based community”. But a new President deserves the benefit of the doubt, so let us just call it an exaggeration for effect.

At the time I considered consulting the intertubes and dragging up quotes from a few dozen economists to contradict the assertion – But – I was feeling lazy, and as he had only been elected a few days before, had not been sworn in, and we had not even really started the honeymoon yet, I couldn’t be bothered. My only editorial comment in that post was a reminder that someone (our children and grandchildren), someday would have to pay the price for this additional debt, in either taxes, inflation, devalued currency or all of the above.

Since then, as the massive stimulus pork laden spending bill took shape, the same statement was repeated in various forms by Obama, by surrogates and by the Democratic leadership. Over the weeks and months, the statement morphed, becoming even more assertive, more arrogant, more imperious and by extension more untrue:

It became an ideological canon of Democratic dogma, chanted at every opportunity. The odd thing, is that Obama appeared to actually believe it, as if by repeating it often enough it would become true.

Last week, my procrastination paid off, as the Cato Institute published a full page ad [PDF] in the New York Times to set the record straight (and make this post a whole lot easier):

Cato also offered a very nifty little widget to promote the ad, which I’d encourage Justin to give a home in the sidebar. It’ll serve to remind him that there are plenty of “smart economists” who do not subscribe to failed Keynesian ideological dogma. Towards the end of his life, even Keynes became skeptical of this kind of Keynesian stimulus.

I was encouraged when public support for the bill fell below 37%. Rational arguments by smart people (even economists) were raised in opposition to this bill. Examples include: Megan McArdle (also here), with Sully chiming in (but still apparently unable to resolve his claimed conservative principles with his continuing P.D.S. affliction), Steve Verdon, Greg Mankiw and others.

Encouraging, but ultimately, the congressional process was a lot of Kabuki theater. After applying a little lipstick, this pig of a bill will now pass (H/T to Q&O for the graphic).

Nick Gillespie hit the nail on the head:

One thing has changed. President Obama stopped asserting that there is no credible opposition since Cato published that ad. He has a different message now.

In Wednesday’s briefing with Treasury Secretary Tim Geithner, Obama’s tough sounding but ultimately meaningless eyewash on limiting Wall Street executive compensation got most of the press. The real message was this quote:

A video of the entire 10 minute event from the White House can be found here. The quote above occurs at 4:42.

The portion of Obama’s comments not related to executive pay was repackaged and regurgitated into a Washington Post op-ed on Thursday – “The Action America Needs”. Compare this quote from the op-ed to his White House comments Wednesday:

Same old stuff. Pay no attention to the content (massive pork) in the bill. Pay no attention to the fact that it will not solve the root problem and will at best delay a day of reckoning. Pay no attention that it will add a trillion dollars of debt that we do not have and will have to borrow from the Chinese or tax from Americans or devalue the currency to repay. Just pass it, because an economic fear-mongering President says it should be pass.

The point: Since there is no more pretense that credible informed opposition to this insane spending plan does not exist, we have a new message – Something like this…

My overwhelming 52% electoral mandate means that Americans want to flush another trillion dollars that we don’t have down the toilet. Because I say so.

Welcome to the post-partisan Obama era.

Did we learn nothing from the hastily passed $700 Billion Wall Street bailout last year? You remember – when we witnessed the rampant stupidity of a craven congress rolling over to an executive demand for fast action on the basis of economic fear mongering – and as a result – were treated to the spectacle of our representatives wasting massive amounts of taxpayer resources without really understanding what they were passing or having any idea where the money will go or how it will be used.

No need to answer the question. We learned nothing. The exact same thing just happened on the floor of the Senate.

Pucker up.

^{x-posted from “Divided We Stand United We Fall“}

President Obama at Democratic retreat: “No more Mr. Nice Guy”

As increasingly partisan battle lines were drawn today over the stimulus program and President Obama  called further delays in passing the huge package “inexcusable,” Harry Reid scrambled to line up a solid Democratic phalanx and woo a few Republicans.  As I write this, it seems that Reid has struck a deal with some of the GOP moderates on a $780-billion bill that would cut some of the long-term spending programs supported by Democrats, while adding some GOP-preferred ideas.  We’ll see whether it passes tonight or tomorrow.

I’m sure it will be the best that can be got in the present atmosphere, taking unto accout the political dynamics in play.  But having watched this process almost hour by hour for weeks, I’m still far from convinced that whatever passes the Senate and makes it through conference to the President’s desk will be all that stimulating. 

After Obama mistakenly allowed the House Democrats to frame the contours of the package, we’ve seen a  debate over it emerge in which reasonable, substantive arguments about what would have the most salutary impact on the faltering economy have yielded to typical partisan squabbling.  Over the past several days, the issue has been posed, falsely, as a binary choice between action and inaction or between “the failed policies that got us here” and the mish mosh of off-the-shelf favorite Democratic  nostrums that House Democratic staffers stuffed into the original bill.

I have consistently supported a massive fiscal stimulus program (as I did here) — but a smart one that would maximize the boost to the economy that we badly need now. I’ve taken seriously these guidelines for effective fiscal policy suggested last year by Larry Summers:  first, the stimulus should be timely and money should go out “almost immediately;” second, it should be targeted mainly to help low- and middle-income people; and third, it should be temporary, meaning measures should not raise deficits “beyond a short horizon of a year or at most two.”

There is no question that many Republicans have been aiming to  score political points with their conservative constituents and with a bit of luck, cut Obama down to size with a perceived ”defeat.”   But some Republican criticisms and alternative proposals have been sound and well worth examining, with Summers’ guidelines in mind.

Which brings me to tax cuts vs. spending.  The argument has been made ad nauseam that tax cuts just don’t stimulate because people will save the money, and that federal spending for infrastructure, education, etc.  will produce more bang for the buck.  There is, of course, a kernal of truth in this but it’s also misleading if you make too much of it.  

Fiscal policy is stimulative when the government runs at a deficit, expanding the money supply.  Further stimulus can be had by directing this newly created money to areas where it will generate added economic activity indirectly.  As to the the first, it matters not at all whether the government runs a dollar’s more deficit by cutting taxes or by giving away printed money.  A deficit is a deficit, and the stimulative effect is the same.  As to the second, spending in an area where more than a dollar of secondary activity will be produced — a multiplier effect — is obviously better. 

So far, so good, but we need to look at Summers’ guidelines.  A big chunk of the initial stimulus bill in the Senate consisted of spending that might well have a higher multiplier effect but won’t be spent for a long time.  Indeed, according to the Congressional Budget Office, $142 billion, or 22%,would not be spent until after September 30, 2010, more than 19 months from now!  Considering the continued downward slide of the economy, even the far larger sum that would not be spent more than 12 months from today is not particularly “timely.” 

In contrast, if a final bill slashed the payroll tax in half, every worker in the country would see more money in his/her paycheck before the end of February.  Likewise, an across-the-board tax credit, retroactive for 2007, would enable most people to get that extra money before April 15th. These and other tax cuts, credits and incentives could put those newly created federal dollars into play “almost immediately,” and also target it mainly to low- and middle-income people who will spend it.  What’s more, such tax cuts could be legislated for a year (or less) at a time, renewed or extended as necessary, and retired when the economy revives so as not to raise deficits “beyond a short horizon of a year or at most two.”

The question is — or should be — this: is a $1.00 of stimulus this year, even this month, really worth less than $1.25 or $1.50 delivered in two or three years when the recession may be over and inflation the tougher challenge?

The ideal stimulus plan, in my view, would include all the proposed relief — i.e., extended unemployment and health care coverage, food stamps, etc. — the truly “shovel ready” infrastructure projects, plus a trimmed down version of some of the more job-producing public investments, about half of what the House proprosed for states and cities (to help meet their current year budget gaps, not next year’s), and a whopping set of temporary but renewable income and payroll taxes targeted to the broad middle class, along with some smartly targeted tax incentives for business and homeowners.

It looks as if the Senate will vote soon on the compromise $780-billion plan, the product of work by Senators Nelson, Collins, Specter and other moderates.  Everyone can be grateful that there are some people in the Senate who think for themselves and have not given up on reaching across the aisle.

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In virtually all news reports, however (like this one in The New York Times), the bad drove out whatever good there might be. That’s not surprising. It has become almost a truism to say that the current economic crisis is “the worst since the Great Depression,” even though that’s demonstrably a huge exaggeration (according to the National Bureau of Economic Research, during the 43-month depression of 1929-33, real GDP plunged 27%, making it about 10 times worse than the next worst post-war recession). Continued gloom and doom are the order of the day. It’s as if no one wants to get out of step, even in the face of what might otherwise be reasonably reassuring news, lest one get tagged as a pollyannish naif.

Of course, the recession may get a lot worse, and many fear it will. It seems headed toward becoming the worst downturn since the back-to-back recessions of 1980-82 or as bad as the deeper (but relatively shorter) contraction of 1957. Then again, maybe it won’t. A look at the actual data in hand so far gives support to both possibilities.

Before falling sharply in the fourth quarter of 2008, real GDP declined by a modest 0.5% percent in the third quarter. While the current recession officially started in December 2007, real GDP was still growing in the first half of 2008 and recorded an overall increase of 1.3% for the full year, compared with a 2.0% rise in 2007. So, 2008 was nothing to write home about, and it ended with a sharp drop and an unnerving financial crisis, but we have a long way to go before this recession can be called the “worst since World War II,” another of the dark descriptions we see and hear daily.

In fact, the most pessimistic current forecasts for 2009 for the U.S. and other advanced economies is that we’ll see them decline by 2% or so over the year. Most economists today believe the U.S. economy will experience another quarter or two of significant decline — perhaps as much as 4-5% on an annualized basis, a return to slow growth in the second half of 2009, and a quickening of growth in 2010.

In its latest forecasts, for example, the International Monetary Fund expects the global economy to grow 0.5% this year and 3% next year (compared to 3.4% in 2008). It anticipates that the advanced economies of the world, in the aggregate, are likely to contract by 2% in 2009 and grow 1.1% in 2010.

It expects the U.S. economy to perform pretty much in line with this, declining 1.6% in GDP in 2009 and then growing 1.6% in 2010. (The IMF believes that some other major economies will have a worse year than the U.S., with GDP declining 2.5% in Germany in 2009, 2.8% in the U.K., and 2.6% in Japan.)

Of course, these projections may be overly optimistic and the recession may be a whole lot deeper and longer (but as happened with the actual data for the fourth quarter of 2008, these projections may also turn out to be too pessimistic).

So let’s assume for the moment that the recession is really a lot worse than the current forecasts would have it and that GDP winds up, say, 10% lower at the recessionary trough. To put that in perspective, it would mean that real GDP per capita in the U.S. and other advanced economies would be back to the level it was in…..the year….2000!

If you’ve lost your job and your health insurance or half the value of your 401-k, or you’re afraid of losing your house, you’re in a terrible personal recession and not interested in data about GDP. And there is no question that this recession, accompanied as it has been by a nerve-wracking credit freeze, a confidence-numbing plunge in the stock markets, and unusually precipitous destruction of jobs, is a tough one, very possible the worst in 25 years or more. Still, the numbers are the numbers, and there are good reasons to believe that we’ll see improvement before the end of this year.

What do you think? Post a comment.

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