Sunday, March 15, 2009

Hamilton: "What will recovery look like?"

by Bill McBride on 3/15/2009 06:10:00 PM

Professor Hamilton provides a number of graphs on the temporal order of a recovery: What will recovery look like?

This adds to my post: Business Cycle: Temporal Order

Here is the table I provided of a simplified temporal order for emerging from a recession. The table shows when each area typically starts to recovery relative to the end of the recession.


During Recession Lags End of Recession Significantly Lags End of Recession
Residential InvestmentInvestment, Equipment & Software Investment, non-residential Structures
PCEUnemployment(1)

And this graph from Professor Hamilton shows the average pattern for all the recessions since 1947.

Econbrowser Temporal Pattern
Credit: Professor Hamilton Econbrowser
Average cumulative change in 100 times the natural log of real GDP or its respective component beginning from the business cycle peak for the 10 recessions between 1947 and 2001. Horizontal axis denotes quarters after the peak.

And here is what the current recession looks like. The record slump in RI has changed the scale of the graph, but the order appears the same.

Econbrowser Temporal Pattern
Credit: Professor Hamilton Econbrowser
Cumulative change in 100 times the natural log of real GDP or its respective component beginning in 2007:Q4. Horizontal axis denotes quarters after 2007:Q4.

For recovery, we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

Unfortunately there are reasons that RI (excess supply) and PCE (too much debt) won't rebound quickly, but they are still the areas to watch.

And here is an excerpt from a research note by Jan Hatzius, Chief Economist at Goldman Sachs, sent out this afternoon:
"Although we still think real GDP will fall by about 7% annualized in Q1 and the labor market numbers remain awful, the good news is that the weakness is shifting from more leading to more lagging sectors."
(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.