The Economy During The Recent Recession
Joanne Cartier
Mr. Fant
ECO 100
March 15, 2013

A recession is defined as a decline in a country’s GDP (gross domestic product) or when the economic growth in negative, two or more consecutive quarters. The state of the economy during the most recent recession was the worst since the Great Depression. In 2008-2009, the economy decreased within five quarters, including four quarters consecutively. Two quarters showed a decrease more than 5% and Q2 in 2008 dropped 8.9%. This was the lowest drop in a recession since the Great Depression. In Q3 2009, the recent recession ended, because of economic stimulus spending. The recent recession was the longest since the Depression, lasting 18 months.
The recession officially started in late 2007 to mid-2009. The Economic Security Index determined the impact of the recession by developing a measurement tool based on government economic data. The tool showed that due to the decline in income, increase in medical spending or both, Americans experienced a financial loss of 25 percent or greater. Southern states showed the worst economic losses from 2008-2010. Researchers found various reasons linked to these states hardship such as, poverty rates, the amount college graduates and unemployment rates. During the last recession, the national unemployment rate was at 5.0 percent making it the lowest in 2.5 years. From December 2007- June 2009, employment decline was the greatest of any recession of recent decades. In most cases, industries producing goods experienced the largest decline in employment during recessions. As stated by the Job Opening and Labor Turnover Survey and Current Employment Statics, during December 2007- June 2009, both construction and manufacturing experienced a decline of employment of 13.7 and 10.0 percent, their greatest decline in employment of the post-WWII period. In months prior to the recent recession, the number of job openings reached a pre-recession peak of
4.8 million in March 2007. Then a decline began even while employment continued to increase to 138 million in January 2008. Throughout the recession, employment declined 5 percent while at the same time job openings decreased 44 percent. Also, the recession caused mass layoffs. Once fifty claims are filed against an establishment for unemployment insurance within a consecutively 5-week period mass layoff will occur. According to the Mass Layoff Statics, in February 2009, there were 3059 mass layoff actions made by employers involving 326,392 workers making it the highest since the data series began. However, financial activities experienced a 3.9 percent decline in employment more than any other industries. The recent recession also affected the establishment births and deaths. As defined by the Business Employment Dynamics, an “establishment birth” is the opening of a new business; an “establishment death” occurs when a business closes. Within the last 3 months of March 2009, a loss of 235,000 establishment deaths and 172,000 establishment births in the private sector resulted in a net decrease of 63,000 establishments. This was the greatest decrease since the data series began in 1992. In comparison to 2010 dollars, the average amount of a consumer unit (“household”) was $46,119 in 1984, and in 2006 it peaked to $52,349. Since the recent start of the recession, on average consumer spending dropped from $52,203 in 2007 to 48,109 in 2010. (Consumer Expenditure Survey 1984-2010) During this recent recession consumer spending decreased in every major category (cash contributions, apparel and services, food away from home, entertainment, healthcare, food at home, personal insurance and pensions, and transportation and housing) except healthcare. During a recession, productivity is more likely to fall than in an economic expansion. Out of the 11 recessions 3 of them had their output fall more than their labor input it leads to a fall in the nonfarm business sectors. With any recession a reduction in the growth of wages and salaries are typical. The Employment Cost Index – which measures the change in the cost of labor, free from the influence of employment shifts among occupations and industries- has been called a “lagging indicator” (www.bls.gov). During 2007-2009, the salaries and wages of private industry employees slowed to 1.3 percent which was far below the 3.6 percentage in March of 2007.
During the recession In the spring 2009, a decrease in US consumer demand caused the automobile industry, General Motors and Chrysler to go bankrupt. Both companies have remained stable due to an emergency loan proposed by President George W. Bush that was objected to by Congressional Republicans.
In October 2008, the U.S. Congress passed the Emergency Economic Stabilization Act of 2008, which then adopted the TARP (Trouble Asset Relief Program). TARP gave the U.S. Treasury 700 billion dollars to buy mortgages and other financial instruments. This didn’t fair to well for TARP; they were unable to recover monies from banks lending activities that were received from the Federal Government. However after the passing of the Stabilization Act, the growth rate of the national economy began to drop. Showing in the percentage rate at -5.4 at the fourth quarter of 2008 and the first quarter being at -6.4%. In response to that, in February 2009, the U.S. Congress passed the American Recovery and Reinvestment Act of 2009. In the accordance with this Act 787 billion dollars was needed to help get the economy out of this recession. This included spending money on health care and unemployment. During this recession, Congress used this stimulus package to create jobs and to help the investment and consumer spending.
When the economy is on a downward slope, the Federal Reserve will cut interest rates to stimulate the activity using a tool known as the federal funds rate. The federal fund rate is used when banks borrow from one another on overnight loans. The Federal Reserve uses this tool as a benchmark for short-term interest rates. By doing this, the Federal Reserve can broadly affect the level of interest rates within the economy. Additionally the government used 1.5 trillion dollars to stimulate economic growth; the Federal Reserve System supplied 2.25 trillion dollars for the buying of securities from banks and providing funds to help with default payments such as, credit cards, student and automobile loans. As stated by John C. Williams, “The policy actions the Fed take from here on out will depend on how economic conditions develop” (Williams, 2012).
In August 2007, the finiancial market started to show signs of serve economic decline. Due to this crisis, the federal reserve’s response is to reduce the federal fund rate by using the monetary policy instrument. By using the expansionary monetary policy tools, they can lower rates as close to zero as possible. In September 2007, the FOMC (The Federal Open Market Committee) lowered the federal funds rate to ease monetary conditions. At the end of 2008, the federal funds rate was reduced to almost zero, and has not changed since. In the middle of the financial crisis in 2008, the large-scale asset purchase program usually called “quantitative easing” or “QE”, was part of the effort to ease credit conditions and make financial markets stable. After the federal rate was as low as it could go, they used nontraditional techniques to keep monetary conditions stable. These new techniques allowed the purchase of large quantities of federal guaranteed mortgage securities and U.S. Treasury debt. The initial goal for these purchases was to directly lower long-term interest rates to support the economic recovery.
The textbook definition of Fiscal policy is “when changes in government taxes and spending affect the level of GDP” (O’Sullivan, Sheffrin, Perez). Using the expansionary fiscal policy the government can stimulate the economy and create more growth. The plan is to put money in consumers’ pockets and they will spend more. This initiates the jump-start of the recovery effort to end the recession. In the spring of 2008, lower and middle-income households received tax rebate checks. In early 2009, the American Recovery and Retirement Act (ARRA) were passed and in late 2009 and early 2010 smaller stimulus measures became law. Roughly, 1 trillion and 7 percent of GDP was spent on fiscal stimulus. The stimulus was supposed to end the Great Recession and trigger recovery.
The current state of the economy is still in a downward slope. In spite of the aggressive regimen of the government’s action, there is still concern that our country will face several for years of slow economic progress. Even with the $800 billion in federal spending, and the credit from the Federal Reserve Bank of trillions of dollars, the fear of a second recession is growing. In August 2010, Ben Bernanke, Chairman of the Federal Reserve Bank, verbally recognized that the economy was not as strong as he hoped but there are new policies to stimulate the economy if conditions worsen. Some important indicators show that the quick drop in home sales, the desolate job market, and affirmation that the quarterly rate of economic growth slowed to 1.6 percent. Down from 2.6 of what was expected, the federal government policy makers feel they may not be able to address this dilemma, and it is because any proposed remedy ads risk to the national debt such as a political nonstarter. The current state of the economy has left many concerned with their fortunes and uncertain about the outcome but hoping for the best.

Reference
The recession of 2007-2009. (2012, February). Retrieved from http://www.bls.gov
Williams, J. C. (2012, January 17). Frbsf economic letter. Retrieved from http://www.frbsf.org