Financial market skepticism has deepened in recent weeks about the sustainability of the U.S. recovery. Chatter about a possible double-dip recession has increased and some pundits have raised the spectre of a depression. Much of the negativity stems from the weak pace of economic growth, which has been less than half the pace of a traditional recovery cycle. Make no mistake, the United States did not experience a typical recession and it won't have a typical recovery. However, the comparison with traditional recessions and recoveries is wrong. The right historical context is to look at the experience of other major economies after a deep and widespread financial crisis.
In 2009, the International Monetary Fund issued a very useful analysis that looked at the duration and magnitude of recessions and recoveries among industrialized countries. It examined four aspects: the length of contraction; the peak-to-trough decline in real gross domestic product; the increase in GDP within the first year of recovery; and the length of time for GDP to return to pre-recession peak levels. The report provided the details of traditional business cycles and those after financial crisis and synchronous financial crisis (SFC).
The IMF found that a typical recession extends just over three quarters, while an SFC downturn – such as the one we have just experienced – generally lasts seven quarters. In terms of depth, the severity of a typical recession is a 2.6-per-cent peak-to-trough contraction, compared with a 4.8-per-cent contraction after an SFC.
Now, consider the recent U.S. experience. While officials have yet to rule on the its duration, the peak-to-trough change in U.S. real GDP from 2008 to 2009 was six quarters. A broader perspective, including a large cross-section of data, will need to be considered before the actual duration is established. But it’s safe to say that the duration of the U.S. recession was between six and eight quarters. And, the peak-to-trough decline in real GDP was 4.1 per cent. So by these two counts, the U.S. downturn was typical given the financial problems that occurred.
How about the recovery? Again, the United States appears to be tracking the average historical experience. Within the first year of recovery, the IMF found that real GDP expands by an average of 2.8 per cent after an SFC – which is about 1.5 percentage points slower than a non-SFC episode. The U.S. economy expanded by exactly 2.8 per cent in the first year of the recovery.
