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More Traction...Just Look Through the Earnings

October 23, 2012

The average growth rates from financial recessions are around 1.2% and by that measure, the US has done well. How well?: i) we're still around 2% below the GDP per capita rate of 2007 but at one point we were nearly 7% below ii) we're at 7.8% unemployment or about 3% above the 2007 level but prior crises saw unemployment triple and stay that way for many years and iii) the US has grown a lot faster than other countries hit with the same problems.
-Christian W. Thwaites, president and ceo, Sentinel Investments

Last week saw an important debate on how the US has fared in the post recession recovery. The short answer is, "not well" if measured by a return to GDP growth trends or per capita income. But the counter, as explained by Reinhart and Rogoff, is "faster than you would expect." We're in the second camp. The nature of the 2008 recession was a systemic financial crisis. These permeate the entire financial system from banks, mutual funds, insurance companies, real estate and debt. And measured by depth, duration and dispersion, the crisis was the worst in living memory. In those recessions it takes about 5 years, in the post war period, and 10 years in all other depression periods, to recover lost ground. This makes it very different from a Fed induced recession to curb inflation or growth (e.g. 1981, 1992 or 2001). In those recessions, a return to growth happens in around four quarters. And these are the types of recession that we got used to in the last 30 years and against which the current generation of financial managers grade.

The average growth rates from financial recessions are around 1.2% and by that measure, the US has done well. How well?: i) we're still around 2% below the GDP per capita rate of 2007 but at one point we were nearly 7% below ii) we're at 7.8% unemployment or about 3% above the 2007 level but prior crises saw unemployment triple and stay that way for many years and iii) the US has grown a lot faster than other countries hit with the same problems. You can see the US story here, which measures wage growth and benefit costs. Benefit costs remain very sticky but wages have yet to regain all of their current ground after the big hit in 2009 to 2010.

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