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University Relations

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Dec. 16, 2008
Contact: Brendan M. Lynch, University Relations, (785) 864-8855.

Research brightens KU business professorís outlook on current U.S. recession

Mark Hirschey

LAWRENCE — As Mark Hirschey surveys the thorny economic circumstances facing the United States today, he does so with a calm eye trained by investigation into the histories of finance, seesawing stock markets and the overall economic performance of the nation.

For instance, Hirschey, the Anderson W. Chandler Professor of Business at the University of Kansas, takes the long-range view on investments — perhaps because through his research he knows the ups and downs of Wall Street going back to the 19th century.

“On average, stocks go up,” said Hirschey. “The history of the U.S. stock market is slow, steady advance punctuated by sharp, irregular declines. We’re in a huge irregular decline right now, but that’s pretty rare and usually they don’t last very long. If you look through the last 50 years, this is the ninth sharp bear market — and usually they last a fairly limited period of time. You’d expect stock prices to be much higher a year or 18 months out.”

Hirschey is the co-author of “Investments: Analysis and Behavior” (McGraw-Hill, 2008), a textbook that combines the study of behavioral finance with an introduction to the field of investments. The KU researcher has penned several other textbooks, scholarly books and some 100 scholarly publications.

These days, Hirschey finds much of the dire commentary on the U.S. economy to be overblown. For example, he said there is scant to compare between the present-day recession and conditions prevalent in the U.S. during the Great Depression.

“The old joke was that a recession is when your neighbor loses a job and a depression is when you lose a job,” Hirschey said. “The Great Depression and the current economic situation have very little in common. During the Great Depression you saw unemployment of 25 or 30 percent. We presently have unemployment in the 6-plus percent range and people are concerned it might go to 8 percent. It very well might. But unemployment here is much lower than in Europe and other foreign countries. We have lots of safety nets out there with unemployment insurance, Social Security and so on.”

Hirschey recently has investigated another key contributor to the economic climate of the moment: the housing bubble. But Hirschey says the boom-and-bust cycle in home prices has had little effect on homeowners in 34 of 50 states, a fact often omitted in discussion of the housing market.

“We’re talking about the first decline in home prices since the Great Depression,” Hirschey said. “But there are a number of things you have to keep in mind when you characterize this decline. First of all, it’s not uniform across the United States. The epicenter of the decline is California, Nevada, Arizona and Florida. Home prices nationwide are down about 9 to 10 percent from the peak only because there have been 25 to 30 percent declines in those major markets. As the economy recovers, you’d expect to see stabilizing prices and rising prices in places like Kansas, because we’ve gone basically untouched by the boom and the bust.”

Other work by Hirschey examines seasonal stock market irregularities such as the “January Effect,” when unusually high rates of return on small-cap stocks are repeatedly seen in the first month of the year. Also, Hirschey has investigated the “September Swoon,” where he found abnormally negative returns on both large-cap and small-cap stocks to be common during that month.

In general, his knowledge of stock market patterns, economic turbulence and the underpinnings of the U.S. financial system give Hirschey an upbeat outlook on the nation’s economic wellbeing, even in the face of the current downswing.

“The typical recession lasts less than 18 months,” he said. “The National Bureau of Economic Research says we entered a recession in December 2007 — and I believe it. A recession is described as a period of slowing economic activity. And high gas prices and stagnant and falling home prices all contributed to slowness in the economy.”

But Hirschey said that frequently it is around the time when statisticians confirm a recession’s start that the recession comes to an end.

“If you look at history as a guide here, it would suggest that sometime between now and the Fourth of July in 2009, you’d expect business to once again turn up and start to reflect the basic strengths of the U.S. economy.”


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