April
2009
Why the recession will be long and painful0
Ashley and I are getting ready for a 3-day weekend in Pucon, the Banff of Chile about 800km south of Santiago–watch for pictures in a week’s time. In the interim, I thought I’d share my perspective on why the recession we’ve been in for a year or so is going to be very long and painful indeed.
There has been much debate in recent weeks about whether the recession will be V-shaped (a very short ‘bottom’ of a couple of months), U-shaped (a few quarters) or L-shaped (many years of stagnation, post-1990 Japan-style). Unfortunately I believe we’re in for an L-shaped recession. Some may argue that I’m overly pessimistic but the following data is interesting food for thought.
The graph below shows annual real U.S. GDP growth from 1996-2006. The first bar (green) is reported GDP growth. The second bar (blue) is GDP growth once mortgage equity withdrawal is taken out. What the graph shows is that since the year 2000, mortgage equity withdrawal (borrowing against one’s home to fund spending) has represented an average of ~100% (!) of U.S. GDP growth from 2000-2006.
In other words, were it not for people re-financing their homes to buy cars, TVs and other goods, the U.S. economy would have been the same size in 2006 as it was in 2000. Fast forward to today, and now that the myth of ever-increasing house prices has been abandoned, lenders and consumers have slammed the mortgage equity withdrawal door shut for a long time to come.
With over 70% of the U.S. economy driven by consumer spending, and the key driver of increased consumer spending (mortgage equity withdrawal) cut off, the prospects for economic recovery look dim indeed.