For Recessions, It's Length That Counts

08/03/2009 1:57 pm EST


Jim Jubak

Founder and Editor,

Last week’s release  of second-quarter gross domestic product (GDP) numbers made it official: The recession that began in December 2007 is now the longest—at 17 months and counting—since the Great Depression.

Next up in the list of dubious records we all hope we don't break is the 1920-21 recession (at 18 months), 1913-14 (at 23 months), 1910-12 (at 24 months), and the grand daddy of them all, the 1929-33 depression (at 43 months).

Why does this matter? Because when you’re measuring 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 gets to dig the economy out of its rut.

Take unemployment insurance. Even with the latest extension in the Obama administration's stimulus package, the benefits expire after, at best, 79 weeks. That means, calculates the National Employment Law Project, that 543,000 workers (and their families) will have exhausted their benefits by September. By December, the number will have climbed to 1.5 million.

Unless Congress extends benefits again, families now somehow getting by with the help of unemployment benefits will lose that money. (Not that it's a huge amount: In New York, unemployment pays $401 a week. Try paying the rent and putting food on the table with 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 what this long recession will produce.

Meanwhile, 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 states like California will have to cut spending even more—again, just in time to wallop any potential economic recovery in 2010.

The evidence also shows that the length of a recession can change consumer behavior more than its depth.

For example, look at the popular “cash for clunkers” program. If consumers think this is a limited-time offer, they'll rush into dealerships to take advantage of the $4,500 in cash offered by the government 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 if the recession drags on, consumers will get used to big rebates and cash-for-clunker offers, renewed periodically as car companies and the government struggle to get the industry out of its skid. So, instead of rushing to the dealers when a program is announced, consumers will wait until there's a $6,000-off deal in place. At some point, the temporary cash offer becomes equivalent to a $6,000 price cut.

Many consumer companies have begun to put marketing and sales plans into place to deal with the “recession duration” problem.

Some are going with what they think will be the new frugality of the times. Ryanair Holdings (Nasdaq: RYAAY) recently discussed the possibility of charging passengers to use the rest rooms during its short-haul flights. The fee, Ryanair CEO Michael O'Leary speculated, would eventually let the airline reduce the number of bathrooms on board and thus cut aircraft servicing costs and free up room for more paying customers.

And 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.

For more of Jim Jubak’s stock picks and market commentary, go to his blog Jubak Picks.

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