Could We See A 1980 Sort Of Recovery From The Recession?

A very solid article in the WSJ today gives some historical perspective on why we might see a surprisingly strong rebound in the economy sooner than expected.

The article uses the recession of 1980 as its basis of comparison. That recession came on very suddenly with a drop in consumption and employment¬†that exceeded what we’ve seen so far. A million jobs disappeared from April to June that year and final sales fell by 7.5% in the second quarter. By comparison, the fourth quarter of this year saw final sales fall by 5.2%. The 1980 recession was brought on by the¬†imposition of credit controls early in 1980 and the resultant drop was as shockingly fast as the decline that the current economy has experienced. What happened next surprised everyone.

On July 3, 1980, when the Fed removed the controls, economists had little hope that a recovery would happen anytime soon. The Fed agreed, forecasting that the economy would contract for the rest of the year. In fact, July was the end of what would be the shortest U.S. recession on record. With the credit crunch over, consumers and companies raced to buy what they had held off on. Final sales rose 5.4% in the third quarter, and a further 3.6% in the fourth.

Such rebounds are actually the norm. Of the 10 largest quarterly drops in final sales over the past 50 years, nine were followed by rebounds the following quarter, with an average gain of 5.4%. The chance of any rebound in the current quarter seems far-fetched after last week’s dismal reports on January manufacturing activity, chain-store sales and jobs. Still, if the government’s coming stimulus package and bank plan are able to restore a modicum of confidence in the economy, recovery could come surprisingly quickly.

If the article had stopped there it would have been merely interesting and perhaps a reason to hope. However, it goes on to discuss the impact that deferred purchases have on an economic rebound.

When the economy contracts by as much as it did in the fall, it means that consumers and businesses are forgoing spending that they might otherwise see as necessary purchases.

In a normal year, for example, about 5% of the cars, pickups and other light vehicles on the road are sold for scrap. With roughly 250 million light vehicles in the country, that means that just to keep up with the scrap rate, about a million new vehicles need to be sold each month. The last time more than a million light vehicles were sold in the U.S. was August, according to the Commerce Department. In January, just 655,200 vehicles were sold — the lowest number in the 33 years of the government data.

Mike Darrah, owner of Darrah’s Automotive & Recycling in York, Pa., said the number of cars people have brought to him to scrap has fallen by 40% to 50% since September.

“People are driving more clunkers,” he said. “They don’t have the money for a new car. They don’t have the money to fix the clunkers. They’re getting by on as little as they can.”

Similarly, companies have cut back on new equipment spending to the point that they may no longer be keeping up with the rate of depreciation on their old equipment. In the fourth quarter, spending on new equipment and software fell at a 27.8% annual, inflation-adjusted rate — the steepest decline in 40 years.

Once consumers and companies start thinking the worst is behind them, they will have some spending to catch up on, as they replace holed socks, keyboards with sticky keys and the like. It may not take long for firms that have laid off employees to find that they don’t have enough workers to keep up.

Unfortunately, the rebound in 1980 was to last for only a year or so. By 1982, the economy was in the grips of what still ranks as the worst recession of the post World War ll period. At that time the country was fighting strong headwinds-inflation and foreign competition-that stunted and eventually killed the recovery.

I wouldn’t be at all out of the realm of possibility that we could see a rebound of similar proportions. I’ve remarked many times that the speed with which economic activity decelerated in the fourth quarter is nothing short of astounding. That could mean that there was an element of overshoot involved and some pent up demand will surface. It also wouldn’t be at all out of the realm of possibility that we follow the 1980’s pattern and find ourselves in the doldrums again relatively quickly.

If anything, I think the structural problems that we face are far greater than those that had to be coped with in 1982. The issues now are global and made especially difficult to cure due to the dysfunction of the financial system. Layered on that is a probable structural shift away from rampant consumerism that will require a radical restructuring of the drivers of the economy. The key may well be to recognize any quick recovery for what it is and use it to prepare for the likely drop of the other shoe.

What do you think the chances are that we will be so wise?

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