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June 28, 2010

Roots of Recession in Homes and Stocks

It isn’t official yet, but the smart money has it that the ‘Great Recession’ has been over for just about a year. When the Business Cycle Dating Committee of the National Bureau of Economic Research meets later this year or next I believe they’ll say the recession hit bottom in June or July of 2009. Recessions end when the economy bottoms out. Good times are still a way off; still this is a good occasion to take store of what has happened.

There is no agreed upon way to measure a recession; but in terms of the usual suspects of declining production (GDP) and the unemployment rate, this last recession would rank as the 2nd or 3rd worst since World War II. In terms of inflation and the Misery Index (the sum of inflation and unemployment rates -- Jimmy Carter’s great contribution to economic policy) this is the least painful recession of modern times. Other data tell a much different story.

In length, this recession holds the post-war record of 21 months, beating the 1973-5 downturn by more than a quarter. Despite common wisdom the largest hit wasn’t to consumer spending, which at a 1.9 percent drop was a post-war record. Instead, business investment crashed a whopping 21 percentage points. The big losers in the economy were those sectors that supplied new businesses – construction, manufacturing and information technology. Though it is best left to another column, these sectors will bounce back more quickly.

The length of the recession makes more sense when you think about its causes. I think we went through two separate back-to-back recessions, though both shared some root causes. The first, which lasted from fall 2007 through fall 2008 was caused by rising energy prices. That downturn popped the housing bubble which led to the investment banking crash of September 2009. This took us into a second, sharper recession. But, all these data don’t make this the “Great Recession.” Something else has given this downturn that moniker.

During the last deep recession of 1981-1982 about 53 percent of households owned their home, while fewer than one in 20 households held stocks. Those were the halcyon days of defined benefit pension plans and widespread confidence in social security.

By the midpoint of the last decade 64 percent of households owned their own home and 6 in 10 households held mutual funds. The exuberance of markets was thrilling. A well-known Marxist colleague of mine (at another university I hasten to add) even whispered to me over a beer how pleased he was at the growth of his stock portfolio, and how it would permit him to retire early, presumably to criticize capitalism. So, the reason we hear talk of a ‘Great Recession’ isn’t because of unemployment or lost production, or due to some failing of capitalism or market economies. It is because so many of us own homes and stocks. This was the Great Recession because, in the end, all of us are now capitalists.

Link to this commentary: https://commentaries.cberdata.org/517/roots-of-recession-in-homes-and-stocks

Tags: recession


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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