How long might this recession last?

by Tony Taccone on February 23, 2009

in Articles,Nerds Only

The current economic downturn has wreaked significant havoc on the global economy and on the steel industry.  Not surprisingly we are all wondering “How long will this recession last and how bad will it get?”  Of course, no one knows.  But there are some historical precedents and while history may not provide a clear answer, it may help us bracket the possible outcomes and put the current crisis in context.

Two economists, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University, have studied the aftermath of previous financial crises and have measured the depth and duration of their economic impact.  Here’s a direct link to the paper, which was presented at the American Economic Association meeting in January 2009.

The economists looked at five variables to measure the recessionary impact of financial crises – the declines in housing prices, equity prices, and real GDP per capita, along with the increases in unemployment and government debt.  For four of the five variables the authors also measured the duration of the downturn.

The data presented in the paper paint a bleak picture.  Housing prices on average declined for 6 years and fell by a total of 35%.  Equity prices fell on average by 56% over a period of 3.4 years.   The average decline in real GDP per capita was 9.3% but “only” lasted for 1.9 years.   The unemployment rate increased by 7 percentage points over 4.8 years and government debt rose by 86%.

The declines in housing and equity prices in the US are now approaching the averages cited above and we have been in recession for over a year now.  This might offer some hope that we are approaching the bottom of the crisis.  I certainly hope so.  But as the authors point out, the previous financial crises were more regional in nature.  This is the first truly global crisis.  So while history may provide some guidance we are, just to add to the uncertainty, in uncharted waters.