Alex Tabarrok at Marginal Revolution has posted a graph comparing the decline in US employment during the current recession with what happened in the past, and Menzie Chinn at Econbrowser has offered a similar graph for industrial production. At first glance, these graphs seem comforting: the current experience seems to be following a moderate course, somewhere in the middle of what we've seen before. But closer inspection shows that all of the paths beneath the current one occurred more than forty years ago, and it's far from clear that those data are directly comparable to what we're seeing now.
What would a Canadian version of those graphs look like? Rather less busy, it turns out. The headline employment numbers are from the Labour Force survey, which started in 1976. Since then, there have been precisely two episodes in which employment declined in a significant way: 1981-82 and 1990-92. I've tracked down a discontinued payroll series that goes back to 1961, but the only thing I could see there was 1970, where employment went sideways. Before that, there's nothing. So in my lifetime (I was born in 1961, which places me in the largest cohort in the Canadian demographic pyramid), there have been only two employment recessions to speak of. Here is what they looked like:
It's important to remember that we're only two months into the recession; our American cousins have been riding this roller-coaster since December 2007. As I mentioned earlier, forecasters are (so far) expecting a fairly mild recession; I've included the most recent Conference Board of Canada projection to illustrate the difference between those forecasts and what we've seen before.
I'll be updating this graph as we go.
Interesting. I just cannot believe the Conference board projection, now you compare it to those last two. My guess (little better than that) is that the Bank of Canada will act very aggressively (since unlike those last two recessions it is not worried about trying to reduce the long-run path of inflation) and we will end up somewhere in between those last two.
Real interest rates went very high in 81-83. Some real interest rates (on long/risky/illiquid assets are high now (though this depends on what you expect inflation to be), but not as high as 81-83, I think.
You're just a kid! I was buying my first house in late 82, and was watching those mortgage rates closely. I think the 81-83 recession will be the closest parallel we can find. House price crash, real interest rates, oil prices too I think.
Posted by: Nick Rowe | January 16, 2009 at 07:33 PM
I think that should read "Jan 10" at the right. Unless this is one of those time-loop graphs from Star Trek. :)
Posted by: Adam | January 16, 2009 at 07:34 PM
Gaahh!! Fixing it...
eta: Fixed!
Probably *not* a year we'll want to live through again.
Posted by: Stephen Gordon | January 16, 2009 at 07:37 PM
Nick, I really don't see the parallel with 1981-83. Interest rates aren't spiking, and governments are willing to increase program spending (back then, restraint was the watchword). Don't know about housing prices, but since we're not looking at 20% mortgage rates (remember them?), it's hard to see how we're going to get see a collapse like what happened back then.
Posted by: Stephen Gordon | January 16, 2009 at 07:48 PM
(back then, restraint was the watchword)
You are such a kidder, Stephen. :-)
Total government deficits as a percent of GDP tripled between 1981 and 1985.
Posted by: marmico | January 16, 2009 at 08:20 PM
Yes, but that was from the fall-off in tax revenues. Real, per capita program spending held steady; see this history.
Posted by: Stephen Gordon | January 16, 2009 at 08:36 PM
Aaaar! (old man sounds), yes I remember those 20%(+) interest rates!
But actual inflation had been much higher, and expected inflation was high too (though there was ALMOST NOTHING to anchor those expectations of inflation -- God how times have changed -- at least in Canada, though not so much the US, without inflation targeting). Now there is a distinct possibility of deflation, and expected deflation. So the difference in real rates between then and now is not so big as it might appear. And it's more commercial paper than mortgages which currently have the high(er) rates.
Nevertheless, I agree with your point. Even adjusting for this, real interest rates were still higher then. And on those grounds, it shouldn't be as bad this time. But I'm trying to remember if other indicators of stress in the financial system were as bad then.
Posted by: Nick Rowe | January 16, 2009 at 09:02 PM
Real, per capita program spending held steady
In the 1981-1983 period:
1.Nominal (real*) expenditures rose 39% (24%).
2.Nominal (real) revenues rose 27% (12%).
3.Nominal (real) debt servicing rose 58% (43%).
Apparently, there is a break in the data set such that the 1983-1985 and subsequent periods are not directly comparable to the 1981-1983 and prior periods.
Restraint was not the watchword of the day. Mulroney/Wilson initiated restraint in 1985 and Chretien/Martin in 1995 poured it on after getting a wakeup call from the now disgraced masters of the universe.
*CPI inflation was about 15% in the period.
As to the employment picture, it seems that we will find out this June as to which track employment is following in this recession.
Posted by: marmico | January 18, 2009 at 05:51 AM
I'm just kinda stunned that Canada can be said to be only 2 months into the recession that is already 13 months old in the US.
and I need to know where all Canada's exports are going now that US consumers are taking a breather.We using the same definition of "recession"?
Can a trading partner like Canada be so...immune?
Do we back this up with the usual "long and lagging" effects...as usual?
I'm prepared to scrap the numbers that pass as data, if only for the spice of itall.
I continue to B amazed at the stone-like (this could be it: dead sources) faces with the UE numbers in the US with that canard of ~12M undocumenteds...surely they have no solid ground with this roving band of labor contaminating what were once respectable BLS numbers.
Stephen writes:
Posted by: calmo | January 18, 2009 at 11:11 PM
A question from a non-economist. If the last two recession ended due to falling interest rates, what do you expect to cause this one to end?
Posted by: Declan | January 19, 2009 at 12:45 AM
Also, is there any evidence that the Conference Board projections are better than (with any statistical significance) simply going with a hypothesis that next months / years growth will be the same as this months / year's . i.e. Is there any evidence that their forecast is not completely useless and irrelevant?
Posted by: Declan | January 19, 2009 at 12:49 AM
No idea. The reason I used the Conference Board is that they published their quarterly forecasts for employment.
If the last two recession ended due to falling interest rates, what do you expect to cause this one to end?
I guess we have to wait for the financial crisis to sort itself out so that international trade flows can start up again. The proximate cause for our recession is the fall in oil and commodity prices; if they pick up again, then that will be a way out. I'll have to think a bit about what if that doesn't happen.
Posted by: Stephen Gordon | January 19, 2009 at 06:12 AM
I think there are very good theoretical reasons why we (usually) can't trust macroeconomic forecasts more than a year out. Paradoxically, this is not because economists are bad; it's because government and central bank economists are as good or better than private sector economists. KNZN has a good post on the reasons, following from my post.
But, maybe, this recession is different, since it will be harder than usual for policymakers to keep GDP and inflation on target, so maybe KNZN's and my reasoning doesn't apply (as much).
Tempting to do a post on these questions, including what could cause this one to end.
Posted by: Nick Rowe | January 19, 2009 at 07:11 AM