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Saturday, August 1, 2009

Some Perspective on GDP Growth and the W Shaped Recovery

Here is a chart of GDP growth from 1929-1940.

Now, if you just looked at the years 1933-1940 you might not even know that we were in a depression. In fact, from the period of 1933-1940 unemployment never reached single digits. In fact, by 1938 unemployment was still at 19%. GDP growth was solid all the way from 1933-1937. Of course, in order to recover from the economic contraction of 1929-1932, it was going to take more than merely "solid" growth. That's why despite what looked like solid GDP growth all throughout the Presidency of FDR we continued in a depression.

Under Reagan's term, Reagan came in with an economic contraction that wasn't nearly as dramatic but still intense. In fact, the second quarter of 1980 saw the economy contract by 10.2%. It dipped another 5.7% and 5.6% in the last quarter of 1981 and the first quarter of 1982. So, it wasn't going to take a solid economic growth to get the economy out of that recession. In the second quarter of 1983 that's exactly what happened. The economy grew by 10.2% and every quarter after that for the rest of the year the economy grew at 6% and more.

The recession of 2001 was even more mild. The economy never even contracted. Instead, it barely grew in 2001 (.02%) and grew somewhat slowly in 2002 (1.9%). By 2003, the economy was growing at 3.7% and we entered a four year period of not economic properity.

We'll have no such luxuries this time. Here are the last six quarterly GDP growth numbers -1%, -6.4%, -5.4%, -2.7%, +1.5%, and -.7%. Now if 2.5% GDP growth is enough to keep an economy growing at a decent or C average pace, and we've lost an average of 2.6% over the last six quarters, then the economy would need to grow by just over 5% over the next six quarters just to get us back to normal.

Now, Fed Chairman Ben Bernanke believes that the economy will start to grow the next quarter of the final quarter of 2009. That's when the real work will begin for the economy. The economy will need some remarkable growth in the next six quarters in order to usher in a recovery.

That's when all the new debts the government has taken on will become an albatross. If the economy were to show that kind of recovery, then that would create higher interest rates. That's when all the deficits that we've built up not only over the last six months but the last eight years and more will kick in. Either remarkable growth will lead to massive inflation or it will lead to higher interest rates that will stunt the recovery and a W shaped recovery. So, we still have plenty of potential pitfalls in front of us and there are no good options.


Anonymous said...

Since you seem very interested in the stock market, I am waiting for your post comparing where the stock market is since Obama took over and where it is now and giving him his due. [about 20% higher isn't it]

Something must be right!?!

Because I am quite sure, if the stockmarket were not higher or lower you would be linking Obama and his policies to it.

mike volpe said...

I don't know of any index that's up 20%. The Dow is up about7% and that's after losing 30 some percent the year previous. The stock market being up 7% in seven months is not necessary anything to crow about. Especially since two weeks ago it was down 3%. There's plenty of time to go. I don't make judgments about the stock market after six months. That's nonsense. Wait three years and see where it's at.