The Great Recession Was Even Worse Than Thought

In yesterday’s release of the 2nd quarter 2011 GDP numbers for the U.S., the BEA also revised some past numbers.  This is not an unusual event.  It’s routine. But the news and revisions this year were disturbing and sobering.

First, a little about how GDP numbers are reported.  In this day and age of instant info when stock markets report numbers within seconds, we tend to think we should get all our data that quickly.  But it’s a really tough job.  Think about it.  GDP is the total market value of all the goods and services produced in a period of time.  For the U.S., that’s a lot of stuff.  There’s over 300 million of us buying things, making things, providing services, etc. The BEA has to add all that up.  Actually it’s got to find out what we did before it can add them up.  Some of the activity must be estimated.  Hard data on a lot of production isn’t even available until months or even years afterward.  In addition, to estimate real GDP from nominal GDP (nominal is what’s observable at current prices), they have to collect immense data on prices of nearly everything.  Looked at this way,they do a pretty good job.

So what happens is that each quarter they release three “estimates” of GDP and growth rates.  The first version is released at the end of the month after the quarter closes. This is the “advance” estimate.  That’s what we got yesterday, on July 29, for the quarter ending June 30.  Next month in late August they will issue a  revision of this number based on more and better information. Then in late September comes the “final” estimate based on even better analyses.  Then they start over in October with the 3rd quarter “advance” estimate, etc.  But in July each year, the BEA takes the opportunity to revise any of the data for the previous year, and at times for several previous years.  There’s nothing sinister here, just more time allows a better, more precise estimate.  And that brings me to yesterday’s news.

The BEA revised GDP numbers back to 2003.  Most of the numbers from 2003-2007 were pretty much unchanged, but from 2007 there’s a significant revision, a significant downward revision. The change shows that the Great Recession (what I prefer to call the Lesser Depression or Workers’ Depression) in 2007-2009 was much worse than previously reported. Instead of losing close to 5% of GDP in the recession, we lost close to 6% of GDP.  Calculated Risk shows the revisions graphically:

The following graph shows the current estimate of real GDP and the pre-revision estimate (blue). I’ll have more later on GDP.

Real GDP

The revisions also mean (as the graph shows) that we aren’t back to where we were in 4th quarter 2007 yet.  In other words, it’s almost four years after the recession began and we still have an economy that’s producing less goods and services than we did back then.  Keep in mind that our population is close to 3.5% larger now than it was then.  Kind of explains the bad the feelings you’ve been having, huh?

Another implication of the revision is that it clearly shows that the government policy response has been grossly inadequate.  The Obama stimulus program, which was clearly too small to deal with even the recession as we thought it was then, was definitely much, much too little.  Given what we now know of the size and scope of the recession, the government stimulus program needed to be at least twice, perhaps three times, as big as it was.  And, it needed to be more focused on stimulating demand through actual spending instead of having 40% of the money be tax cuts that wouldn’t be saved and wouldn’t help the economy.

Finally, a perusal of the graph shows us two things.  First, we lopped off a big chunk of the economy in 2007-09.  That’s lost opportunity.  It’s lost income. And it’s the 10%+ unemployment rate.  But more disturbing is the fact that the so-called “recovery” since then, a recovery that hasn’t gotten us back to the beginning, is itself running out of steam.  The curve is flattening in 2011.  That’s because the rage in Washington by both Republicans and the President has been for budget-cutting.  Budget cutting is contractionary fiscal policy.  They’re trying to slow down the growth of an economy that’s pretty much already run out of steam.

What to Call This Unpleasantness? Little Depression or Workers’ Depression?

Brad Delong has had enough.  So have I.

“The Little Depression”

Back in late 2008 people asked me: is this a recession or a depression? I said that I would call it a depression if the unemployment rate kissed 12%. I said that I would call it a depression if the unemployment rate stayed above 10% for a year.

Neither of those has come to pass. But the unemployment rate has kissed 10%, and has stayed at or above 9% for two years now.

So I am moving the goalposts. I am adopting a suggestion in comments of Full Employment Hawk . Henceforth, I will call the current unpleasantness not “The Great Recession,” but rather “The Little Depression.”

It’s a good question.  In late 2008 when people were asking me, I said I wasn’t sure.  It would either be “The Great Recession” or “The Lesser Depression”, I said.  Eventually I fell in line with most commentators and referred to it as “Great Recession”.  But with the continuing bad, very bad, news on employment, wages, and growth, I’m with Brad.  We need to call this what it is.  It’s not been a “Great Recession”.  Recessions are events when the central bank says things have gotten out of hand, they raise interest rates, and everybody sobers up.  Then after an appropriate time of perhaps 6-12 months, the growth machine fires up and we start to regain lost territory.  This is different. We aren’t regaining lost ground and people are suffering.

What most folks are calling the “Great Recession” I think we ought to call the “Panic of 2008”.  It was, after all, a good old-fashioned financial panic updated with 21st century technology and corporate forms. It lasted roughly the time period the NBER says was the recession.

What has me going though is the continuing poor conditions for the millions of Americans.  This unpleasantness has gone on too long and been too severe to call it recession.  It’s a depression of some form.  The problem here is how to distinquish it semantically from the Great Depression of 1929-1940, or the Long Depression of 1873-1896.  My personal preference is for Workers’ Depression.  I think it sums it up.  For the banks and rentier classes, it’s good times again.  It’s only for working stiffs that things continue so ugly.  But if people want to use “Little Depression”, I could go along for the sake of clarity.