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October 13, 2008

Financial Market Mayhem Feeding Recession

It will be some months before we know for sure, but I would wager today that the United States is in a recession. Our current unemployment rate is right about the 50 year average, productivity is up and living standards have never been higher. But, the economy has likely been pushed into recession because uncertainty about credit will dramatically slow hiring and production for the next few months. Demand for goods will also be affected. This is financial market mayhem spreading to goods and labor markets. 

We’ve enjoyed a growing economy for 79 out of the last 80 months. The last two recessions we’ve suffered, the two mildest post-war recessions, were overshadowed by the current events of Desert Storm and 9/11. 

My best estimate, though no econometric model can yet tell us, is that the recession will be a lot like 1990-91. The actual recession will be brief and modest, but the pain will persist for some months afterwards. Since the last major recession was in 1982, you have to be pushing 50 to have been an adult in tough economic times. For that reason a little perspective is in order.

Napoleon especially valued what he called 3:00 AM courage. It is the ability to remain calm, composed and forward looking when information is sketchy but unpleasant. Kipling called it keeping your head about you when all others are losing theirs. Now is a good time to follow this advice. A good first step would be to turn off Jim Cramer’s Mad Money. 

Recessions, even big ones, actually have a much more modest effect than most believe. A sharp rise in unemployment, perhaps 2 or 3 percent, will likely reflect longer periods of unemployment not just new people losing jobs. This may affect one out of every 50 families. This is unpleasant to be sure, but in a normal year, close to two in ten workers change jobs. A bad recession could be compared to having those turnover folks unable to find new jobs. 

Fewer than 15 families out of every 100 will be affected by lower incomes. Most of those affected will be folks working on commissions or in companies that will have to cut back hours. Retail and construction are prime candidates for this slow down, as are consumer durable manufacturers. 

You are about to read a rash of media reports about growing ranks of the destitute, broad job loss and extreme misery. Be skeptical of anecdotes. 

If I have learned one thing over the past year or so it is that we’ve become so accustomed to good economic times many of us have lost the ability to tell when times are bad.

Link to this commentary: https://commentaries.cberdata.org/92/financial-market-mayhem-feeding-recession

Tags: finance, 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. Hicks earned doctoral and master’s degrees in economics from the University of Tennessee and a bachelor’s degree in economics from Virginia Military Institute. He has authored two books and more than 60 scholarly works focusing on state and local public policy, including tax and expenditure policy and the impact of Wal-Mart on local economies.

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