Experts: Economy crisis depressing, but it's no Depression

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Depressing yes, but no way a Depression
Economists say even the most dire scenarios pale to miseries of '30s
By DAVID IVANOVICH
Copyright 2008 Houston Chronicle Washington Bureau
Oct. 18, 2008, 11:52PMShare Print Email Del.icio.usDiggTechnoratiYahoo! BuzzWASHINGTON — Many Houstonians remember the vacant storefronts, the unfinished cul-de-sacs, the devastated home values of the Oil Bust days of the 1980s.

Fewer can recall an even more desperate time half a century earlier, when Americans were lining up at Depression-era soup kitchens, Dust Bowl farmers were abandoning their homesteads and Houston business leaders were scrambling to keep the city's banks afloat.

More recent, though perhaps less a part of the local consciousness, was a crushing, decade-long recession in Japan.

With the credit crisis shaking the world's banking systems, housing prices falling at rates not seen since the 1930s and the Dow Jones industrial average heaving in dizzying fashion, economists cannot help but note the parallels with previous catastrophes.



"I can attest that the current situation ... has much in common with past experiences," Federal Reserve Chairman Ben Bernanke said last week.

While disconcerting — even alarming — such parallels almost certainly do not portend an equivalent experience.

True, economists warn that the U.S. economy is now slumping into what could be the worst recession in a generation.

In fact, Nobel-winning economist Joseph Stiglitz fears the nation may be about to experience a much more severe recession than many other experts have been contemplating, perhaps "one of the longest downturns since the Great Depression."

But the current slump (opinions vary on whether it's a recession yet) is not at all likely to approach the devastation wreaked by the Great Depression, experts say.


Collapse in GDP
From 1929 to 1933, the nation's gross domestic product shrank 27 percent, according to the National Bureau of Economic Research. That's 10 times worse than any economic slump since World War II.

In 1932 alone, the GDP declined by 13 percent. And by the following year, one in four American workers was unemployed.

Nigel Gault, chief U.S. economist for Global Insight, said that even with conditions deteriorating rapidly, his most pessimistic scenario predicts the economy could contract by about 2 percent next year.

And the unemployment rate, which stood at 6.1 percent last month, could climb as high as 7.5 percent by the end of next year.

If Gault is correct, that would be the highest jobless rate since 1992, after the 1990-1991 recession.

Numerous economists now believe the recession will be at least as bad as that downturn and could be the most painful since the early 1980s, when the unemployment rate, inflation and interest rates were all in double digits.

At this point, few economists are anticipating a recession of that severity. "It's not 1982," said David Wyss, chief economist for Standard and Poor's.

Columbia University's Stiglitz, the former chief economist for the World Bank, is among a growing number of economists predicting a slow recovery.

Economists at the International Monetary Fund expect the U.S. economy to decline through the first quarter of next year, then stabilize in the spring and begin a "gradual recovery."

And despite frequent comparisons with the Great Depression, Japan's experience throughout the 1990s may be more instructive. Like the current U.S. situation, Japan's recession was sparked by a drop in housing prices, which then caused major problems for the banking sector.

"That's the one that really scares me," Wyss said. While economists believe they have a handle on what went wrong during the Depression, they're still arguing about Japan.

After years of prosperity, Americans have grown unaccustomed to serious recession.

The nation's last experience with recession was an eight-month stretch in 2001. But that downturn was so mild it did not even fit the common definition of a recession — two consecutive quarters of negative growth.

Economists, however, have rather flexible notions of what constitutes a recession and, in fact, no consensus about how to define a depression. The National Bureau of Economic Research's Business Cycle Dating Committee is the official arbiter of economic slumps. And it deemed the depth and duration of the 2001 downturn enough to merit the recession designation.

Houston — so far — has been largely shielded from what is becoming a world economic downturn, thanks to high energy prices. But those days of insular bliss soon may be coming to an end.

"It's really been oil that is the barrier between us and the recession," said Robert W. "Bill" Gilmer with the Federal Reserve Bank of Dallas, a district that includes Houston. "You need to be looking over your shoulder."

More than half of the Houston region's economy is dependent on the oil and gas sector. And strong oil and gas prices have kept energy companies hiring, while others were cutting back.

"Labor shortages are prevalent in the energy sector, and firms continue to steal workers from other industries," the Federal Reserve said last week in its eight-times-a-year snapshot of business activity known as the Beige Book.

The Texas Workforce Commission reported Friday that the local unemployment rate for September edged up to 5.1 percent, from 5 percent in August. That's about a percentage point lower than than the rest of the nation, according to the Bureau of Labor Statistics.

But with economies weakening, oil and gas demand has fallen and their prices have dropped to half the levels of just a few months ago.

Houstonians, of course, have experience with plummeting oil prices.

In the early 1980s, Houston's economy was soaring along with what seemed to be oil's ever-upward trajectory, even as the rest of the country was mired in severe recession. Then crude prices crashed, and the area's unemployment rate doubled in less than a year.


Standing apart from nation
By June 1986, local unemployment reached 13 percent, nearly twice the national average, Bureau of Labor Statistics records show.

The area's real estate market plunged. Some banks failed, and others, including venerable Texas Commerce, merged with out-of-state institutions.

With oil prices reaching record heights this year, surpassing even the highs set back in the early 1980s on an inflation-adjusted basis, Houston has stood apart from the rest of the country, said Barton Smith, director of the Institute for Regional Forecasting at the University of Houston.

"I'm not predicting we're going to see a collapse of energy like we did in the eighties," Smith said. "But ... six months, nine months from now, we're not going to look much better than the rest of the country."

As difficult as conditions were during the 1980s oil bust, older Houstonians can recall when conditions were even worse.


Better able to respond now
Cattle breeder Frederic "Freck" Fleming, 82, of Houston remembers when his family moved out of their house to an apartment his mother's family had inherited.

Retired ophthalmologist Louis Daily, 89, can recall a controversy on the Houston Independent School Board on which his mother served.

"Someone wanted to fire all the women teachers, to replace them with men so the men would be employed," Daily said. "My mother was opposed to that."

But eight decades ago, government leaders didn't know how to respond to the stock market crash and subsequent economic decline. Indeed, their approach almost certainly exacerbated the problem.

Today, economists have a far more sophisticated economic tool-kit, thanks to the revolution in the economics profession ushered in by John Maynard Keynes, said Jim Glassman, senior economist with JPMorgan Chase.

Back in 1933, the nation's jobless rate averaged 24.9 percent, while in 1982 it averaged 9.7 percent for the year.

Today, Glassman observed, "we're frenzied about taking care of this problem when unemployment is 6.1 percent."

david.ivanovich@chron.com