Saturday, September 22, 2012

When It Went Wrong

When did things start down? Where was the bump in the road that triggered the Great Recession? In this election season, that question matters in the short term for trying to choose the folks most likely to not send us back down the same path. Partisans from both major parties would love to tell us things when wrong under the other party's watch, but only one side can say it accurately. So when did it start?

To begin answering that question, we can't just look at GDP or unemployment alone. While those may tell us when things really got bad, they don't tell us when the problem started. To get a better idea of when the problem started requires focusing further back than when it became obvious to everyone. The overall economy was hammered by a financial crisis, but that financial crisis didn't just spring up on its own. The financial crisis was triggered by a stumbling housing market. So when did housing tumble off the cliff?

Chart of housing starts, building permits, and residential construction with color coded Presidential terms and Congressional majorities; showing that housing fell off a cliff in 2006. Where the economic foundation cracked: a sharp drop in homebuilding over 2006 during the 109th Congress (R) under President Bush II (R). Those who think the 110th Congress somehow created the problem need to take another look at the data. Things started going wrong before the 110th Congress was even elected.  Housing (starts, building permits, construction) with Presidential party and Congressional majority from January 1998 through July 2012 (data from U.S. Department of Commerce: Census Bureau)
Housing fell off a cliff in 2006; in 2007/8, it was just still falling from 2006.

Building permits peaked on September 2005 and then proceeded to fluctuate through January 2006. Housing starts peaked in January 2006. Then after January 6th, both building permits and housing starts tumbled off that cliff, followed soon after by residential construction. Between the January 2006 peak and the start of the 110th Congress in January 2007, housing starts dropped by 38% and residential construction dropped by 15%. The housing industry was collapsing throughout 2006 and bringing layoffs starting with housing and spreading into related domestic industries such as window and cabinet making. Following on housing's decline, manufacturers new orders hit choppy waters in 2006, . By the end of 2006, the effects weren't yet enough to seriously shake unemployment or turn GDP negative, but the decline did start to show in other measures and a slackening of quarterly GDP growth. The annual growth in consumption per capita for 2006 started back down from what we'd seen in 2005.

Annual consumption/capita growth from 1996 - 2011, showing that demand was falling in 2006 from 2004/5 levels as the decline in the housing sector started to drag on the economy
Demand/person slowed down in 2006 ... before getting to an actual drop.

Put it all together it's really only a technicality that the recession didn't hit until late 2007. In fact, the economy was already in rough shape in 2006, with really lousy growth evident over the 2nd and 4th quarters of 2006, to the point of quarterly GDP growth just barely staying out of negatives.

Read GDP growth to end of quarter from 2005 to 2007, showing faltering -- if not quite contracting -- GDP in 2006
2006 wasn't technically recession; but it was darn close.

Clearly, the first wave of what became the Great Recession was well under way during the watch of the 109th Congress (2005-2006) under President Bush II, even though we hadn't reached technical recession yet. What happened during the 110th Congress was just that it became clear that the problem -- which was already under way -- was spreading from housing into finance and from there to everything else. The curtain covering over the problems was pulled away in 2007-2008, but the trouble was there before the curtain pulled away. Republicans held majorities in both Houses of the 109th Congress, as they had for almost all of the time since 1995 (except for a slim Senate flip in part of the 107th Congress). By 2006, Republican policies had held sway in both the executive and legislative for years and they were still in control. While there's room for debate as to how much involvement government had in the creating or allowing the mess, the weight of evidence says that if one were going to blame governance, the party to blame for that mess is Republican.

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