Recession Won’t Morph Into an American Depression:
Commentary by John Dorfman
Feb. 9 (Bloomberg) -- There is no more important investment question at the moment than this: Is the U.S. entering a depression?
There are, of course, reasons to think so. The federal government has felt obliged to take over large, well-known companies like American International Group Inc. Gross domestic product declined 3.8 percent in the fourth quarter, making it the worst quarter in the past 25 years.
Layoffs and firings are endemic. Payrolls fell by 598,000 in January, the biggest drop since December 1974.
The stock market’s action is another ominous sign. In 2008 the Standard & Poor’s 500 Index recorded its worst year since 1931. Both the S&P 500 and the Dow Jones Industrial Average just logged their worst January on record, down 8.6 percent and 8.8 percent, respectively.
These indicators aren’t to be taken lightly. But this doesn’t mean we’re entering a depression.
I define a depression as a period of economic contraction that lasts two years or more and that pushes unemployment to 10 percent or more. By comparison, the Great Depression lasted for a decade (1930-1939) and saw unemployment reach 25 percent. Today U.S. unemployment stands at 7.6 percent, the highest in more than 16 years.
Recession Record
The U.S. has officially been in a recession for 14 months. The two longest recessions since World War II (a period of 63 years) each lasted 16 months. This one seems almost certain to last longer.
Here are six reasons why I believe we’re unlikely to have a depression, and why current conditions don’t echo those of the 1930s.
-- The U.S. and its trading partners have so far resisted the temptation to fight economic fire with gasoline. They haven’t set up major new trade barriers or started trade wars in an attempt to help the home country at the expense of others.
Such trade wars were a big feature of the economic landscape in the 1930s. The Smoot-Hawley Tariff Act of 1930 attempted to protect American markets by raising tariffs on 70 agricultural products and 900 manufactured goods.
The measure backfired. Within two years, 25 other countries had retaliated with tariffs of their own. By 1932, partly because of the new trade barriers, American exports had fallen to $1.6 billion, from $5.2 billion in 1929.
Obama vs. Hoover
-- The White House is trying much harder to stimulate the economy than our leaders did in the early 1930s. During Herbert Hoover’s presidency, Congress raised taxes in the teeth of the depression in 1932, increasing the top bracket to 63 percent from 25 percent and reducing personal exemptions.
By contrast, President Barack Obama is seeking tax credits for households making less than $150,000. The reasoning is that tax cuts put more money in people’s hands, spurring them to spend and rekindling economic activity. Tax cuts appeared to do just that under President John F. Kennedy in the early 1960s and under President Ronald Reagan in the 1980s. Congress is busy debating the size and nature of the stimulus package. If it turns out to be about as large as Obama has proposed (in the $800 billion to $900 billion range) and gives employers greater incentives for hiring, it too might help us avoid a depression.
Shock Absorbers
-- Monetary policy is friendlier than it was 75 years ago. The Federal Reserve Board is trying to keep interest rates low and the money supply ample. By contrast, the Fed allowed the U.S. money supply to contract by one third from 1929 through 1933.
-- The U.S. over the past seven decades has created a number of social programs that act as shock absorbers. People who in 1933 might have become hobos or beggars today have some purchasing power thanks to programs such as unemployment insurance, welfare, Medicare, Medicaid, and Social Security.
-- Today’s means of communication and transportation are better than those of the Depression era. The Internet, television and air travel make it easier for people living in one place to take advantage of job opportunities in another.
-- Fourteen months into the recession, some economic indicators are showing glimmers of improvement. Sales of previously owned homes rose 6.3 percent in December. Railcar loadings, a favorite economic indicator used by investors in the 1920s, jumped more than 30 percent in the first two weeks of January from December’s depressed levels. The stock market has held for 11 weeks above its 2008 lows.
The 52 percent decline in the S&P 500 from October 9, 2007, through November 20, 2008, was enough to anticipate a very stiff recession. So if we are not in a depression, we are probably in the midst of a major buying opportunity.
I believe that stocks are fairly likely to be up 10 percent or more a year from now, and up 30 percent or more within three years.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.
Last Updated: February 9, 2009 00:01 EST |
