Editor’s note: Dr. Harry Davis, professor of banking at Appalachian State University, is economist for the North Carolina Bankers Association. This is the NCBA’s latest “Business Barometer.”
RALEIGH, N.C. – The 1981 and 1975 recessions were the longest in the post WWII period. Each lasted for 16 months. This recession enters its 17th month in April and will continue till the end of the year making it the longest in the post WWII period.
This recession will last so long because the 2001 recession really wasn’t one. In that recession, consumer spending slowed but never decreased. GDP only declined .4 percent the smallest amount in any recession. Therefore, we have actually been in an expansion since 1992 or for the longest period by far in history.
Recessions are a natural and essential part of an economic cycle. This recession will end. They occur when excesses lead to bubbles which ultimately must burst. The latest expansion produced the greatest credit expansion in history which created the housing bubble. During this decade, housing prices increased faster than incomes. Government agencies and part of Wall Street supported subprime loans allowing households to buy houses they could not afford. As is true of all bubbles, the housing bubble had to burst which it did by the end of 2006.
This recession will be similar to the 1981 recession in length and severity. The recovery will not begin till the fourth quarter of this year. Gross domestic product will decline by about 3.5 percent which is slightly greater than the decline in the 1981 recession. The unemployment rate will continue to rise beyond the end of the recession and will reach 10 percent.
There are some positive signs.
The latest housing sales figures for February suggest the market is near or nearing a bottom. The Federal Reserve has pushed mortgage interest rates to record lows, which is stimulating demand for home sales and creating a refinancing boom. Both actions are good for housing and the financial sector.
Second, commodity prices have stopped dropping which is another positive sign.
Third, the latest programs announced by Treasury Secretary Timothy Geithner to buy toxic assets and other types of securities has given the financial markets confidence in his leadership. The markets are happy to know the treasury secretary has a clear plan that will help the financial sector which is critical for a recovery.
While the recession will end by year-end the recovery will experience slower economic growth than in the past. First, much of the world is experiencing a severe recession which will hamper our export sector for the next year. Second, the unprecedented increase in government debt over the next 24 months will require restrictive monetary policy in 2010 which will also hold down the rate of economic growth.
Our state economy is suffering much more than the national economy. Our state has a large manufacturing sector which has been severely hurt by the slowdown in world trade. The state unemployment rate, which now is fourth highest among states, started from a higher level in this expansion that the last two. We can expect our unemployment rate to rise to 12 percent soon and continue to rise into next year.