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It's official: This is now the longest recession since the Great Depression. Here's why that matters
08/03/2009 12:29 pm EST
Next up in the list of dubious records we all hope that we don't break is the 1920-21 recession (at 18 months), 1913-1914 (at 23 months), 1910-12 (at 24 months) and the grand daddy of them all, the 1929-33 recession (at 43 months).
Why does this matter? Because when it comes to the effects of recessions, it's length that counts.
First, the longer that a recession drags on, the more painful it is to the most vulnerable among us and the harder it is to dig the economy out of its rut.
That's because so many of the counter-cyclical programs in our economy have only limited duration. Take unemployment insurance. Even with the latest extension in the Obama administration's stimulus package, the benefits, such as they are, expire after, at best, 79 weeks. That means, calculates the National Employment Law Project, thsat 543,000 workers (and their families) will have exhausted their benefits by September. By December, the number will have climbed to 1.5 milion.
Unless Congress does something to extend benefits again, families now somehow getting by with the help of unemployment benefits will lose that money. (Not that it's a huge amount of money: In New York, which is near the top of the scale, unemployment pays $401 a week. Try paying the rent and putting food on the table for a family with kids for that.)
And so will the economy. The Federal Reserve estimates that come December the unemployment rate will still be 10% and the economy will still be trying to claw its way out of the recession. Just when you don't need to cut the income of 1.5 million workers. But that's exactly the result that the extended duration of this recession will produce.
And the duration problem isn't limited to unemployment benefits. You can see the same effect if you look at state budgets. States that have seen their tax revenues fall have struggled to balance their budgets usually through some mix of actual spending cuts and accounting gimmicks that push obligations off down the road. The longer this recession stretches on, the less effective those accounting gimmicks will be and the more that states such as California will have to cut even more from their real spending. Exactly in time to wallop any potential economic recovery in 2010.
And second, duration matters because the evidence from past recessions says that when it comes to changing consumer behavior how long a recession lasts counts for more than the depth of a recession.
That's only commonsense. Look at the cash for clunkers program as an example. If consumers think this is a limited time offer, they'll rush to the dealerships to buy a car and take advantage of the $4,500 in cash offered by the government program plus the $1,500 to $2,500 in cash back offered by many auto companies. Who, driving a pickup with 200,000 miles on it, wouldn't take the deal?
But let's say the recession drags on and on. Consumers get used to cash for clunker offers, renewed periodically by the government as it struggles to get the car industry out of its skid. They also get used to big cash back offers from car makers. Consumer psychology changes: Instead of rushing to the dealers when a program is announced, consumers start staying away from dealers unless there's a $6,000 price cut in place. At some point, the temporary cash offer becomes equivalent to a $6,000 price cut.
Many conumer companies--and the companies that provide them with research and advice--have begun to worry about this and to put marketing and sales plans into place to deal with the recession duration problem.
At some, the solution is to disguise prices. Nissan announced on August 3 that it would produce an electric car for the mass-market beginning next year. The company hasn't set a price yet for the new car, but says it will be competitive against gasoline-powered cars in the same class. But the price won't include the battery. Drivers will lease that separately from Nissan.
At others,the solution is to shift the source of profits. I wrote about that in my previous post on how computer retailers are offsetting declining laptop and net book prices by hoping to make money on accessories.
Some are going with what they think will be the new frugality of the times. Ryanair Holdings (RYAAY) recently discussed the possibility of charging passengers to use the restrooms on board on its short-haul flights. The fee, Ryanair CEO Michael O'Leary speculated, would eventually let the airline cut down the number of bathrooms on board and thus free up room for more seats and cut aircraft servicing costs.
And finally, some are betting, that they can defend prices even if this recession goes on and on, by raising quality. Consumers will be willing to pay for value, they believe.
Exactly what combination of these (and other) strategies will work depends largely on how long this recession does last. And for how long, even after it is officially over according to the National Bureau of Economic Research, it still feels like a recession to many of us.
It's a good bet that at 17 months, this recession has already changed consumer habits in so-far unpredicatble ways.
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