National Bureau of Economic Research Says Recession Started in Dec '07

The National Bureau of Economic Research says we entered a recession in December 2007. This raises a bunch of interesting questions.

The National Bureau of Economic Research (NBER), a non-profit group of economists tasked with determining the start and end of recessions, says that a recession began in December 2007.  The groups report, entitled: Determination of the December 2007 Peak in Economic Activity says that:

"...a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months."

There are several things to note about the numbers:

  • The first is that the recession began even before the collapses of Bear, Lehman, Fannie, Freddie, AIG, etc.  Credit at the beginning of December was plentiful and the banking storm wasn't even on the horizon yet.
  • We've been in a recession for 12 months, 4 months longer than the recession that preceded the collapse of the Internet bubble.
  • The expansion before this current recession was 73 months, short compared to the 120 month expansion before the Internet bubble popped.

I draw two conclusions from this. 

  1. This is a much deeper recession than what we've seen in some time.  This may sound obvious but the Dow is only down 40%.  That compares with a drop of 49.1% for the tech crash in 2001 and 48.2% for the oil crash of 1973-74.  During this recession we've had an oil induced crash and a banking crisis that rivals that of the Great Depression.  On top of that, the crisis has become international in scope.  During the Great Depression, the market fell by 89.2%.  To see a graphical display of this, check out this nice chart entitled The Four Bears.  You can also see a similar analysis on the BestCashCow article Dow Jones Industrials Crash Analysis - Great Depression Versus Today.
  2. This recession and the Bear Market may just be a continuation of the downturn that began in 2001.  Look at the chart from the Crash Analysis article using the blue 2008 line.  I would argue that the tech crash and the recession that preceded it were just a small bump in the road.  It hardly stalled the rise in the Dow.  The recession was mild.  Housing prices continued to go up, unemployment was low, and most importantly, banks continued to give out, or even accelerated giving out, cheap money.  The world was awash in liquidity.  That is what changed so profoundly in 2008.  The massive wave of cash and liquidity that drove the world's economy to such fast growth is gone.  The banks that supplied it are bust.  That is why I believe this is a different type of recession than we've seen in a long time.  It will be longer, more painful, and have a greater impact on stocks and bonds than anything since the Great Depression. This is not just a recession, but the end of an economic order built on plentiful cash and loose lending.

See the best savings rates here.


Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • ktexas

    December 02, 2008

    It sure would be brutal if the market fall ends up to be similar to the 89% decline of the Great Depression.

  • Sam Cass

    December 02, 2008

    I don't think we'll see an 89% decline, but I think it will be worse than 40%. Take the midway point of 65%.

    On an related note, I received a note from JP Morgan Chase today and they are advising their clients to go to cash. Not that they understand this any better than anyone else but it shows the level of fear that is out there.

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