How long will it last and how bad will it get?

Last week, my colleagues and I were treated to a superb overview on the U.S. and Oklahoma economic outlook by Chad Wilkerson, an economist who heads up the Oklahoma City Branch Office of the Federal Reserve Bank of Kansas City, as part of the Economic Security for Oklahomans meeting hosted by the Oklahoma Asset Building Coalition. Wilkerson’s message was fairly simple:

• The U.S. economy is very weak, but may be nearing the bottom. While unemployment is expected to rise even further over the coming months and Gross Domestic Product for 2009 may fall by the greatest amount in over 30 years, the declines may be stabilizing.
• The latest projections of the Federal Reserve’s Open Market committee are for “real GDP… to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end.”
• Oklahoma was late to the economic downturn, but we are now shedding jobs at the same dismal rate as the nation as a whole, as can be seen from the chart.



Source: Federal Reserve Bank of Kansas City

• Oklahoma’s unemployment rate has soared from 3.8 percent to 5.9 percent in just the past six months. Other indicators of of economic distress, such as home prices, foreclosures, and delinquent loans confirm that the recession is now in full swing locally (The Fed’s website presents a number of key economic indicators for Oklahoma through February; also, see our most recent Numbers You Need for an overview of economic trends).

However, Wilkerson contends that it is likely that the recession will not be as long or as deep in Oklahoma as in the nation as a whole. He presented a chart (which I haven’t been able to locate online) comparing the average length of national recessions in Oklahoma relative to the nation over the period from 1957-2003. Historically, Oklahoma enters a national recession considerably later than the nation as a whole, as a result of energy prices staying high during the recession’s early stages. By the time the recession hits the Sooner State, federal policymakers have usually had time to adopt corrective monetary and fiscal policies, which benefit Oklahoma as much as states that have endured longer and more acute pain. As a result, we tend to emerge out of recession at about the same time as, or a little earlier than, everyone else. Overall, our recessions on average have been a full two quarters shorter than the full nation’s.

Certainly, the current recession is conforming to the pattern on the front-end. When I asked Wilkerson whether he expected the recession to get as bad here as elsewhere, he responded that it depends on how long the downturn lasts. Since our economy in recent months is declining more steeply than the nation’s, our unemployment rate, for example, could catch up to the national average over the course of a prolonged downturn. But if the historical pattern holds, it is likelier that the bottom will not be as low here as elsewhere and we will begin to see jobs and economic growth recover at about the same time and at a similar pace to the nation.

What does the Fed’s view mean for Oklahoma’s budget outlook? If we are already nearing the bottom of the economic downturn, it suggests that we may start pulling out of the budget shortfall sooner than we have been thinking. If that’s the case we should put every effort into maintaining essential public services next year so we have a strong base to build on as the recovery begins.