How Long It Could Take to Recover from the Recovery

by George Leong, B.Comm.

The Great Depression did not end in 1930. Actually, it had merely started. Similarly, the Great Recession will not end in 2009. And although recovery may have started, judging by the summer bonanza in stocks and certain improving economic indicators, it is far too soon to relegate this awful recession to the history books just yet.

Granted, it is not that always easy to differentiate between the end of a recession and a full-blown recovery. Some developed countries, like Canada, may have been spared the worst of the crisis thanks to their superior banking systems. But in the U.S., the blow to the economy and financial system had been so devastating that it may take years, not months, to fix everything that had gone wrong, particularly the housing market, the collapse of which had wiped out trillions of dollars worth of personal and corporate wealth.

Even worse is the U.S. employment landscape, which is not likely to enter the expansion phase anytime soon. In August, the U.S. jobless rate was 9.7%, while economists forecast that it will hit 10% by the time the year is over, because many employers are not done cutting jobs yet.

Now, the current unemployment rate of 10% may seem a far cry compared to the Great Depression numbers. To illustrate, the jobless rate in 1930 was almost 16%, nearly doubling from the rate of 8.7% a year earlier. But there are a couple of menacing parallels that can be drawn between the post-crisis economies of the 1930 and 2009.

For example, if unemployment calculations from 1930 were to be applied to the 2009 calculations, the current unemployment rate would actually be approximately 16.3%. In other words, the unemployment rate would be slightly worse than the employment rate in 1930. What is excluded from today’s calculations? That would be workers who have given up looking for work, and workers who are on leave, who are on strike, who are working part-time or attending job re-training programs. And, in addition to the jobless rate being in a similar range, just like today, there had been a surprising and hopeful bounce in the stock market.

Of course, the world in 2009 and the world in 1930 are two very different beasts. But history lessons should never go to waste. Actually, there is no need to go that far into the past either. There are more recent examples that could be just as useful history lessons; such as the recessions of 2001 and 1991, when the jobless rates continued increasing even as the rest of the economy started bouncing back up from the bottom.

The best-case scenario should be something like this: the Great Recession most likely ended in the second quarter. But if the recessions of 2001 and 1991 provided any guideline, unemployment is not likely to peak for about a year and a half to two years. In fact, this recovery is likely to be more jobless than the previous two recessions and probably on par with the Great Recession. So we could be looking at the second quarter for 2011 before we start seeing this lagging indicator moving in the right direction.