Q&A: Professor predicts downturn’s swift end

A recession is not only looming, it is here. It likely started in December 2007 or January 2008. Here is a simple definition of a recession: two consecutive quarters of falling real Gross Domestic Product (GDP). The National Bureau of Economic Research in Cambridge, Mass., is the official arbitrator of recessions, and the chair of the bureau committee, Martin Feldstein of Harvard University, has already explained unofficially that he thinks a recession started late last year. The committee dates recession by months. It will not offer an official date on the start of the downturn until next year. But, it sure feels like a recession to many of us.

Q Economic downturns are old news to some people, but for others it is happening for the first time. Can you give some examples from previous declines?When has this happened before?What causes it?

The previous two recessions in 2001 and 1991-92 were brief and did not result in much of a decline in real output. The 2001 recession actually started in late spring 2001, well before the Sept. 11 terrorist attacks, and was a result of weak consumer confidence. The 1991-92 recession is normally associated with the first Gulf War. Both recessions lasted about eight months and the output drop was just by a few percent. The previous recession before that was in 1981-82 and that was a doozy ... coming off double-digit inflation, we ended with double-digit unemployment rates. The current recession, my belief is, will be pretty mild and short-lived. I hope that is more than just wishful thinking. Recessions today are shorter and milder.

Q How does this affect different age groups? Do you have any tips for coping?

Well, some belt-tightening is necessary. But take the long view: recessions are a necessary part of the capitalistic business cycle. One never heard of recessions nor the business cycle in the Bible or Homer. For those nearing retirement, some switch to guaranteed income products would have been useful last year. For those with a longer time horizon, save as much as you can and smile.

Q How long do you think this will go on for, and how soon can we recover from it? Will the economic stimulus package passed by Congress make a difference?

I take the same view as the Fed - recovery will begin in second half of 2008, but it will be tepid at first. Remember, in most recent recession of 2001, the recovery took a long time to gather steam and many employers were reluctant to hire or recall workers until they were absolutely certain that economic conditions looked better. At the time, we called it the jobless recovery and it was noted for the small number of new jobs created in the first year or so. As for the stimulus package, my guess is that it will help, but make only a very modest impact. A good deal more could have been accomplished with aggressive extension of unemployment benefits. We missed the boat there.

Q Is Frederick County impacted more than other parts of the country? Less? Why or why not?

Good question. I think Frederick County is a little less impacted than the rest of the nation because two major employers are a big part of the county - government and the healthcare industry. The former usually finds steadier employment patterns and is not as affected by the business cycle as the private sector. The latter is driven by demographics, but five of the county’s biggest 20 employers are directly tied to healthcare (the hospital, insurance, research). But there is no doubt that the county’s construction firms and financial service firms, such as banks and mortgage companies, have been hurt. The national unemployment rate was 5.1 percent in March. According to the last figure for February, Frederick County’s unemployment is 3.3 percent and the state of Maryland’s is 3.8 percent.