For a well-informed and insightful analysis of the current economic climate, Directorship turned to economist Victor Zarnowitz, one of the country’s foremost authorities on business cycles and a senior fellow and economic counselor at The Conference Board. At 89, Zarnowitz has studied, documented, and chronicled the economic peaks and troughs of modern times. He is also a research associate for the National Bureau of Economic Research, which determines when the United States has fallen into recession. This fall he published a stirring account of his life and times titled Fleeing the Nazis, Surviving the Gulag, and Arriving in the Free World. Zarnowitz has seen it all and what he sees right now is a recession. But don’t use the D-word: He doesn’t think this one will be much worse than most.
You have been mapping U.S. recessions and recoveries since the 1960s. At least one former Fed chief says the U.S. economy is now in a recession. Do you agree?
Yes. We have been, believe it or not, in a decline in the U.S., and are in a recession, for about a year. The best indicator of this is the U.S. Composite Index of Coincident Indicators, which confirms this view. This index peaked in October 2007 and has been declining mildly but steadily since then. This is somewhat similar to our last two recessions in 1991/1992 and in 2001, but already this one is longer at 12 months than the last two, which lasted eight months each.
What are some of the indicators that you look at to determine how long and deep a recession is going to be?
We look at the U.S. leading index, the coincident index, and the lagging index. We want to compare the present to past periods, so we look at the same indices each time: Changes in working hours lead employment, new production of orders and contracts lead goods and services, construction contracts lead construction, and these sequences repeat themselves time and time again.
This cycle has been compared to the period leading up to the Great Depression. How is it similar and how is it different?
That’s a great exaggeration. This downturn is very, very different, and so was the preceding boom. We have an unemployment rate of 6 percent, which doesn’t compare with a rate that was three or four times larger than that in the 1930s. The decline is still very much milder than it was then. Government reaction has also been much better. During the Great Depression, wrong policies were applied that aggravated rather than improved economic conditions. If there are similarities, it is in the housing sector. Like now, housing prices fell, which is a rather rare and ominous occurrence.
So instead of comparing our current economic crisis to the period before the Great Depression, you think it is more analogous to what was happening prior to the recession of the mid-1970s?
Exactly. Only in the 1970s, it was more severe than what we’re experiencing right now. The recession in the mid-1970s was a combination of two of the worst things: inflation and negative growth, referred to as stagnation. And we don’t have that. At least not yet.
Is there a correlation between the size of a boom and the resulting bust?
Absolutely. More often than not, there will be positive correlations. The larger the boom, the larger the bust. That is often the case, yet not always.
What do you make of the government’s response to the current crisis?
I would say it was earlier than usual and, for the most part, well done. That is one reason to hope that it will not be so bad, because we have more and better policy. Another factor that is less well known–and it’s important–is that the American economy has changed greatly since the Great Depression. It used to be that manufacturing and goods production was more important and now it’s production of services. And services are far less cyclical than goods—particularly durables—and less vulnerable to recession. The government sector is also much larger, and government is least cyclical of all the sectors. It is true that policy has improved somewhat, too. So, in general, we have what some people have called the great moderation of business cycles. When we look at business cycles early in the post World War II period, and in the 1960s and 1970s, there were much more severe recessions and they lasted longer.
Some argue that the current crisis is not so much due to lack of liquidity, but to investors’ lack of confidence. What do you think is the cause of the current market turmoil?
It’s probably more a lack of confidence. But we had a long period—an overly long period—where we had too much liquidity. Too much of anything is never good.
What do you make of the massive volatility in the stock market?
The stock market is an opinion maker and shaper. It has a strong effect because people lose or win in the process and they watch it closely. It’s also important to know that the stock market itself is not a reliable indicator of the broader economy. It is part of the leading indicators, and it deserves to be included, but it is not a reliable indicator in the way that new orders and contracts are. The stock market is very subjective and so it reflects expectations rather than reality, and it creates a lot of uncertainty and pessimism when it goes down the way it has.
What are some of the things that economists are getting wrong?
We are always getting something wrong. It’s awfully difficult to forecast and we probably don’t deserve as much blame as we get. The best I can tell you is that we have probabilities and no certainties at all.
Is there anything that you have seen in this current cycle that surprises you?
What surprises me is the disruption of what has been called “the great moderation.” The expansion during the 1990s was the longest on record and it lasted 10 years from the trough to the next peak. And now we are in 2008 and we’ve only had an expansion of about seven years in between and already the decline is 12 months long, so we don’t have a clear moderation. Instead, we have a shorter expansion and a somewhat more severe recession. People talk about this all the time. The media talks about the rising severity and have forgotten moderation. It’s important not to exaggerate.
What are you working on today?
I’m still working on developing the same kind of indicators used in the United States for a variety of other countries in central Europe and Asia. The United States still has a very big impact on the rest of the world’s economy. We should be careful not to exaggerate that, either. In the case of the Great Depression, our recession spread around the world. But it’s too early to tell what the effect of this period will be. Unlike what some headlines are declaring, we are not necessarily “facing the abyss.”