We’re Halfway to a Lost Decade

Our current slump began a lot earlier than you think. Which means that we’re half way to a lost decade.

Many people date the financial crisis as beginning when Lehman collapsed in September 2008.  But the economy was already in recession. The NBER reckons the recession began in December 2007. But look closely, and you’ll see that it may have begun a year earlier.

That’s the case I made in my latest my latest Marketplace commentary, which you can listen to here. The point is more easily made with a simple graph:

The blue line is the usual measure of GDP, which is obtained by adding up total spending. When you read the newspapers, this is the number they report. But the Fed’s Jeremy Nailewaik has convincingly shown that red line—which is the sum of all income—is the more reliable measure.  In theory the two lines should be identical—one person’s spending is another’s income—but in practice, the measurements differ. I’ve also plotted the peak, trough, and latest reading of each measure.

Focus on the red line, and you’ll see that the recession began in the final quarter of 2006, not the end of 2007. The red line also fell by more, and over a longer period. And today, GDP remains below its levels nearly five years ago. The economy had already run out of steam halfway through Bush’s second term. That’s why I say we are halfway to a lost decade.

Even this isn’t a fair comparison, as the population has continued to grow. So let’s transform these into per capita numbers:

The red line now shows five things much more clearly:

1.      The slump began in late 2006. And indeed, we were hardly enjoying good times through early 2006.

2.      It’s a big slump, and GDP per capita fell by over 7 percent.

3.      We remain a long way below the previous peak.

4.      It’s going to take a long while to return to where we were back in 2006. Most forecasters are expecting GDP to grow by around 3 percent, implying per-capita growth closer to two percent. At those rates, average incomes in 2013 will (finally!) be back around the levels of 2006.

Finally, it’s worth emphasizing another key statistical finding from Nalewaik’s research: Over the next few years the Bureau of Economic Analysis will continue to revise their estimates of what has happened, and if history is any guide, their revised estimates of the blue line will look a lot more like the red line.

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  1. econobiker says:

    Last quarter 2006 is about right based on the bellwether heavy duty tractor- trailer truck industry production going downhill per the 2007 increase in emissions costs. The heavy truck industry is just now recovering. This industry is a bellwether due to the need (-or lack of -) to transport goods and commodities.

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  2. Chad says:

    I would like to see this data continued into the past more to see what historical norms are like.

    It could be that when the two values were indexed (Q4 2006) could be a time where the income-based to spending-based ratio just happened to be really high. The main changes are between Q4 2006 and Q4 2007. It could be that this ratio was just regressing back to the mean.

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  3. John says:

    Please help the ignorant: does the gap between the spending curve and income curve get spent “overseas”? Where did that money “go”?

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    • James says:

      Also, where did the money in the gap between spending & income come from?

      This certainly conflicts with the usual picture of the years prior to 2008, when people were supposed to have been financing excess spending with home equity loans and consumer debt.

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      • kent says:


        There is no money in that gap. It’s not a gap between any two real things. It’s just a difference in how one single thing is measured.

        GDP = total spending.
        GDP also = total income.

        But our measurements of total spending, and of total income, are subject to errors. The question is, for this particular time period, which of the ways of measuring GDP is closer to reality.

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    • Robb says:

      Buying on Credit! The graph of purchase prices of houses overlaid with falling sales numbers of same during those years is even more divergent.

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  4. Joshua Northey says:

    Good blurb.

    I do take issue with: “Many people date the financial crisis as beginning when Lehman collapsed in September 2008.”

    Maybe many ignorant people…There was certainly a lot of hand wringing and worry in early/mid 2007.

    And people were talking about the coming reckoning on marketplace and in the economist as early as 2003, or 2004. I know I wasn’t the only one who heard all those stories about home prices becoming decoupled from incomes. Maybe the war was too distracting for people to remember clearly?

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  5. Sam says:

    I’d think that the gap is largely about CREDIT. The spending-based measure peaked when the declining economy (and home price peak) became very visible even to the most naive consumers, and then collapsed when credit went away entirely in 2008. No more home-ATM means no more spending.

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    • Michael says:

      No, the gap is simply a measurement error. Measuring GDP is cumbersome and messy. Both the income approach and the expenditure approach attempt to measure economic activity, but by different means. Thus, they don’t always result in identical outcomes.

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  6. dan says:

    Plot a rise in fuel prices and you will also see why the economy finally collapsed.

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  7. DaveyNC says:

    Hidden due to low comment rating. Click here to see.

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    • Ryan says:

      And they immediately destroyed the economy in their first act of congress, as they were being inaugurated?

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      • DaveyNC says:

        Hidden due to low comment rating. Click here to see.

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      • bob says:

        You don’t think maybe it was all the spending under Bush. You’re aware he doubled the national debt. That’s quite a feat, but Reagan tripled it.

        Now the republicans are screaming about debt and blaming democrats. Don’t misunderstand, there’s plenty of blame for democrats too.

        But I can’t believe that you look at the situation we are in, huge deficits, reduced local business ownership, outsourced jobs, etc and then reduce it to “democrats did it”.

        I can’t believe that you aren’t thinking more about it. It’s like a religion. Something happens, and then you instantly mold it to your pre-existing belief system.

        I think you should collect data before making conclusions.

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      • DaveyNC says:

        Look at the graph. That is quite a sudden drop in 4Q 2006, isn’t it? It makes one wonder if there were a precipating event during those three months. An election would be one, don’t you think?

        I didn’t say that Democrats did it. I said that employers and companies looked at their new market conditions and responded accordingly. I am sure that there were numerous other factors, but you can’t help but look at that sharp drop and wonder what happened to cause that.

        It was meant to be a provocative question and I guess it was. Kind of disappointing that the blog’s thumbs up/thumbs down feature effectively squelches contrarian opinions. Maybe the Steves will re-think that feature.

        I’m not an economist and do not have either the time or the skill set to go about collecting the data and proving or disproving the idea, but I would think that an economist would look at that sudden drop and wonder if some specific event happened to cause it.

        Here’s another question for the forum: What happened on August 28, 2008? One possibility;http://addednoise.blogspot.com/2010/02/what-happened-on-august-28-2008.html

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    • Jeremy says:

      Yup, and the recession under Bush 2 was caused by Clinton, the boom under Clinton was caused by Reagan, and Carter is probably to blame for the oil crises somehow, right? Do you actually believe this garbage?

      This blog is for rational argument using data to back up theories, not wildly unlikely B.S. that would be impossible to prove.

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  8. afinta says:

    I am just a part time blogger, but I have a time stamped dated post calling the recession before anyone “real” did:


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