Curious about why our savings account rates have been slumping? Ever wonder how our current economic cycle ranks among other business cycles? Economic graphs and charts reveal some trends.
Analyzing The Current Economic Cycle
I enjoy looking at historical financial charts; it gives me a chance to digest the big picture. Now that we’re formally living in a recession for some time now, do you wonder how this economic recession stacks up against all others? I’ve been curious about how this whole thing will unfold, especially since my money wants to know if it’ll still be around in a year’s time!
A while back, I wrote a post on recessions and the state of the economy, discussing the predictors and signs of economic recession, and how the recession and the stock market are linked, among its topics. I found it to be fascinating study.
This time, I stumbled on some awesome graphs by an analyst of International Economics, Paul Swartz. It gives us a look at how the current economic downturn compares to previous recessions. Although these charts don’t claim to be completely predictive, my brain can’t help but try to project the future from what we see here. What I found most interesting is this one glaring point that differentiates the 2008 recession from everything else: its cause.
Ours is a red-headed stepchild of a recession.
While past economic down cycles are typically caused by monetary tightening, the one we have now was triggered by imbalances in our financial system due to credit system woes and a swinging pendulum of overextensions then overcorrections in the markets. The hiccups in our financial system now are due to overreactions in the markets and financial institutions, consequences of the massive hangover that follows unchecked booms. Things were unregulated for sometime, with financiers, investors, money lenders… even consumers, showing great disrespect towards investment risk.
I liken it to what happens in nature: think super volcano, or mega earthquake. We’re bound to feel tremors and aftershocks for a long time.
Business Cycles Portrayed In Cool Charts
Here’s a subset of those charts (or graphs) I came across. The blue line on each chart represents the track for the average of all post WW II recessions. The red line tracks the 2008 recession. The recessions begin at “0” with the gray section corresponding to the recessionary period that lines up with our current year, 2009.
US Real GDP Growth
US Federal Budget
Now and going forward, you can blame the economic stimulus and financial bailouts for the deterioration in the Federal Budget.
Job losses look like they’re in lock step with the numbers from past recessions… so far.
It’s interesting to see consumers holding back their spending this time, maybe as they anticipate developments in their financial future?
People are clearly anxious about their financial status, more so now than they’ve ever been.
Most telling is how our economy’s troubled status did not arise from changes in monetary policy (or a rise in interest rates). You can see here how the Fed is being proactive about managing this recession with swifter and deeper rate cuts than usual. If our situation adheres to the trends, then rates look like they can easily go lower.
Stock Market Performance
You can see how the stock market has tanked disastrously, relative to past recessions. I hope this is an overreaction that spells great opportunity!
Other Findings From Economic Graphs and Trends
The following discussion pertains to the rest of the charts in this report.
Other findings show that manufacturing numbers are quite negative, with a deep contraction predicted for the manufacturing sector. Vehicle sales and oil prices show a larger slump than usual as well. During “normal” recessions, vehicle sales normally slide by 20%; this time around, they’re down by 30%. Also, the behavior of oil prices bucks previous oil pricing trends, with prices way below the norm for a recession.
Lastly, if you take a look at the corporate debt indicators (via what’s called the “investment grade debt spread” and other measures of debt spreads), you’ll see that these indicators are showing an “unprecedented” rise in the risk of defaults by corporate bonds. What is this investment grade debt spread? The Wikipedia’s definition:
The difference between rates for first-class government bonds and investment-grade bonds is called investment grade spread. It is an indicator for the market’s belief in the stability of the economy. The higher these investment grade spreads (or risk premiums) are, the weaker the economy is considered.
With the spreads higher than they’ve ever been, I suppose this points to a pretty unstable and terribly weak economy. I guess this is what happens when we let a good thing go on for too long (re: the peak of subprime lending and the real estate bubble). In the case of economies and investment markets, too much of a good thing can hurt!
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