First, here is a chart of oil prices with the spike outlined:
Notice the price spike the occurred at the same time as the beginning of the recession (7/90). Oil shocks are a very big issue in the US economy. For more on the topic, please read Professor James Hamilton's paper on the topic, which is located about halfway down the page. However, this does not explain the entire contraction, as oil prices increased sharply throughout the early 2000s expansion. Also consider that much of the contraction occurred in residential and non-residential construction, which was ultimately caused by the savings and loan crisis.
Yesterday, we looked at the recession, which was primarily one where investment dropped like a stone. Both residential and commercial real estate contracted in big ways, leading to a drop in PCEs.
However, the economy did not emerge from this drop in activity strongly. The NBER dated the end of the recession in March 1991, yet GDP grew 2.7%, 1.7% and 1.6% in the second, third and fourth quarter of 1991 respectively. And as noted in this article, initial unemployment claims and the unemployment rate remained stubbornly high for over a year after the end of the recession. In other words, there was talk of a jobless recovery.
Let's take a look at the three quarters following the end of the recession. I'm using the 2Q91 as the starting point because the recession ended in the first month of that quarter.
GDP grew 2.7% and PCEs added 2.01 to that. In other words, people spent money. Investment only subtracted .23 from the growth rate. Also note there wasn't a huge stimulus from government spending -- it only added .29 to the growth rate.
While non-residential investment dropped 10.5% from the 1Q91, residential investment increased 9.8%. That is the primary reason for the lack of negative impact from gross private domestic investment.
In the third quarter of 1991, GDP grew at a slower pace -- 1.7%. PCEs -- which only grew by 1.5% from the previous quarter -- added 1.01%. While non-residential investment dropped a whopping 23.5% from the previous quarter, residential investment increased 17.6%. In addition, business investment in equipment and software increased 6.6%.
in the fourth quarter of 1991, real GDP grew 1.6%. PCEs actually decreased .2% from the preceding quarter, but that was offset by a huge increase in investment. While residential investment increased 9.1%, non-residential investment only contracted 7.9%.
Finally, note that in 3Q and 4Q 1991, government spending subtracted from growth.
So. at the end oft he third quarter after the end of the recession, we have the following:
1.) PCEs are weakening, actually contracting in the 4Q91.
2.) Residential construction is expanding
3.) Non-residential investment is improving, although still negative (the rate of decline is improving).
4.) Initial unemployment claims are above 420,000
5.) The unemployment rate is holding a little below 7% (it would eventually increase to a little over 7.5% in 1992).
In other words, there's a lot of similarities between then and now.
