The worst recession since…?
Kurt Brouwer September 10th, 2009
There have been lots of claims that this was the worst recession since the Great Depression. As a loyal and frequent reader of Fundmasteryblog you know better of course.
The correct answer is that this is not even close to the worst since the Depression. Here is a new chart from blogger and economist Donald Marron:
Source: Donald Marron
As you can see, this downturn is not close to the 1945-47 decline so it is definitely not the worst since the 1930s. You could fairly say that this is the worst recession since the aftermath of World War II, but even that still overstates things a bit because the GDP decline was more than three times deeper than this time around.
Back in March, we wrote this:
GDP: Great Depression vs. Current Recession
To start this comparison, here is a chart from the wonderful Calculated Risk blog that shows how far GDP has declined in this recession versus that the cataclysmic decline during the Great Depression:
Source: Calculated Risk
Calculated Risk had this to say about the chart [emphasis added]:
What is a depression? (Calculated Risk, March 10, 2009)
…The Great Depression saw real GDP decline 26.5%.
The post-WWII recession lasted 8 months and saw real GDP decline 13%. This decline in GDP was due to winding down the war effort - something that was celebrated - and is excluded when analysts call the current slump the “worst since the Great Depression”…
This point about the post-World War II recession is a good one that is often overlooked. It was sharp and severe as our war effort wound down and millions of men and women returned from the war. It was a deep recession that is largely ignored in all the media hype about this being the worst downturn since the Depression.
Just the facts please
All this talk of the Great Depression is interesting and informative, but also not very accurate when you look at the facts.
Via: The Corner
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The unemployment rate in the 1945-1947 recession reached a high of 3.9%. It was a recession in terms of GDP only, and remember the nation was shifting down from a huge wartime economy to a peacetime economy. I’ve always maintained that declines in GDP from peak are not nearly as important as the output gap and the gap between unemployment and natural unemployment or NAIRU in defining the severity of a recession. By both measurements this is clearly the worst recession since the Great Depression.
The previous peak post Great Depression peak in the output gap occured in the fourth quarter of 1982 and was 7.4%. We surpassed that record in the second quarter at 7.5% according to the CEA. Since NAIRU was 6.0% in 1982 and peak unemployment (November and December) was 10.8% the difference then was 4.8%. Similarly since NAIRU is currently 4.8% and unemployment was 9.7% in August the difference was 4.9% by this measure we have surpassed the 1981-1982 recession by that measure as well.
One might go still further and consider the duration of the output gap. In other words one could calculate percentage-output-gap-years, or the area between actual output and potential with potential normalized to unity. To my knowledge, nobody has attempted that so far.
Recently I decided to put my money where my mouth is and calculate percentage-output gap-years. data for real GDP comes from the BEA of course. Data for potential real GDP comes from the CBO. The major problem is of course that the BEA has recently considerably revised recent GDP figures but the CBO has yet to follow up.
The 1980-1982 recessions fell into an output gap in the first quarter of 1980 and stayed there through the third quarter of 1987. The total output gap was approximately 18.2% of potential annual GDP (a post Great Depression record).
If one assumes that GDP equaled potential GDP in the fourth quarter of 2007 and then assumes growth in potential GDP similar to previous CBO projections from that point on one finds the following. The total output gap so far is approximately 5.8% of annual GDP. Thus it ranks in fourth place after the 1980-1982 recessions, the 1990-1991 recession (7.9%) and the 1974-1975 recession (7.4%) in that order (so far). (Interestingly although the 1990-1991 recession was not sharp, due to the slowness of the recovery it ranks second by this measure.)
Since it we are only six quarters into this recession it might be a better comparison to look at the other recessions at that point. Six quarters into the “1980-1982 recession” we had a total output gap of only 2.5% of annual potential GDP. The worst, after the current recession, was actually the 1974-1975 recession at 4.8% of potential annual GDP. The third worst was the 1990-1991 recession at 3.8% of potential annual GDP. So at the six quarter point, this is the worst post Great Depression recession, by the percent-output-gap-years measure.
Mark — When I see one of your lengthy comments, I know I’m going to learn something. I also know that your findings are almost certainly going to lead to a different conclusion than mine.
One problem with your formulation is the level of NAIRU (the lowest level of unemployment consistent with not triggering inflation). I remember back in the 1990s, Paul Krugman pegged that number at about 6%.
I will have to take a look at your output gap statistics. My point stands though. Most commentators think of recession in terms of GDP decline. And, though that may be too narrow for you, it is still clear that this recession is not even close to the Great Depression in terms of GDP decline. Further, while I grant that the 1945-47 downturn was due to the changeover from WWII, it was still far more severe than this one. So, this is not the worst recession — in GDP terms — since the Depression.
Kurt
You wrote:
“And, though that may be too narrow for you, it is still clear that this recession is not even close to the Great Depression in terms of GDP decline.”
Nor is it close to the Great Depression by the standards that I suggested. There was no NAIRU then but if we had to guess it was probably 4.5%. Thus the gap between unemployment and the natural rate was probably about 18%. And we don’t have “official” estimates for potential GDP but it’s probably fair to say that the output gap reached a peak of about one third of potential in 1933. And as far as my suggested-potential-output-gap years criterion, I estimate that the Great Depression resulted in a loss of output equal to about 80% of annual GDP.
But the 1945-1947 recession didn’t amount to much if anything in terms of these criteria. We went from producing tanks, bombers and aircraft carriers on a truly massive scale to producing wide lapeled suits, Chevy Fleetmaster Station Wagons and Levittown tract houses. Very few people found it hard to find a job and many, many women traded in playing Rosie the Riviter for being a stay at home mom with a small posse of children. There’s simply no comparison with that and our current situation.
Isn’t it premature to assess the damage when most of the losses are still hidden and have yet to be realized?
Taking into account an accurate measure of unemployment, there are currently upwards of 19.7% of the workforce out of work. Even the Q6 number is spurious. As a product of wealth destruction, and unemployment, lack of employment generation, this is the worst recession post Great Depression.
Thanks for excellent comments. Whether we look at GDP or unemployment, this is a serious recession. I am not in any way downplaying it. Yet, it pales in comparison to the Great Depression. Now, maybe a number of new events such as higher taxes and trade protectionism could bring about a reincarnation of the Depression, but at this point in time we are not remotely close to that level. That’s the point of looking at the numbers in this piece.
Unemployment is high now at 9.7%. And, if you want to count involuntary part-time workers and ‘discouraged’ workers, then the number would be in the mid-teens. However, using that same methodology for the Great Depression yields a number that would have been much, much higher.
Factually, were unemployment to be measured in the same manner as it was in the 30’s, the unemployment number would be significantly higher. As well, there was structurally not the same manner of employment, where degreed people would be considered “Under”-employed as is the current situation. Ergo, it is truly specious to argue, Mr. Brouwer, that this recession is not the worst post Great Depression vis a vis the very important matter of employment. Not the least of which is the destruction to come as increasing numbers of well-paid white-collar people are laid off.
As well is the looming mortgage re-set issue, where a large number of households are not going to be able to refinance into a product which allows them to maintain the house. Yet again a situation that did not face people in the Great Depression era.
It is at minimum problematic to compare and contrast different eras, given the fact that there has been huge structural changes to the society at large. To argue in any manner that the current financial damage is not substantive and in many measures the worst since the so called Great Depression is truly the work of the silly academic. Solutions to the substantive and myriad of issues, now that would really be something of import!
Michele–in this post, I made one point only. Namely, that — based on GDP declines — this is not the worst recession since the Depression. That fact is irrefutable. You’re now extrapolating to other areas such as employment that I did not cover. , but that’s not the point of this post.
You mentioned mortgage defaults as though there is any comparison to the Depression. Estimates of urban mortgage defaults rates for 1934 are about 50%. Default rates were very high from 1926 through 1941. Now, urban mortgages in default are around 12%. That — 12% — is outrageous, but it’s not nearly as bad as it was back then.
I’m not trying to say that everything is groovy. Nor, am I suggesting that this is not a severe recession. It is. It is just that it is far, far different than the Great Depression.
What I am stating specifically is that unemployment is the worst it has been since the Depression in the 30’s.
As well, it is spurious to seek yet again, a direct comparison to mortgage defaults, as very few people held actual mortgages in the 30’s; and, modern mortgage product is not even tangentially comparable to any previous period. Given the fact that population is so much larger now, your statement of a 1934 50% default rate is not adjusted!
Michele — assuming you are looking at BLS data, then this is not the worst. Almost, but not quite. Their data go back to 1948 so it misses the short, but very sharp post-war recession.
Even if we do not include 1945-47, unemployment was 10.8% in 1982 and 10.4% in 1983. Both were higher than our current level of 9.7% I believe unemployment will go higher, so we could very easily surpass the 82-83 levels.
You initially raised the issue of mortgages in the Depression, not I. My post was only about GDP. Nonetheless, many Americans lost homes and farm and businesses in the Great Depression. In addition, we had natural disasters such as the Dust Bowl. So far anyway, we have not seen poverty-related mass migrations such as Hoovervilles and Okies in this downturn. Let’s hope we don’t.
Factually this is the worst recession since the depression as measured by the number of jobs eliminated, bank failures, foreclosures (Number yet to be measured as there is a continuing default amongst Alt-A, and Alternative Product) Wealth destruction in most asset classes. Factually we are no where near a bottom on this matter. By the measures that count, among a spectrum, proving to be the worst.
[…] that this was the worst recession since the Great Depression. The correct answer is that this is not even close to the worst since the […]
[…] that this was the worst recession since the Great Depression. The correct answer is that this is not even close to the worst since the […]
As I was “corrected” by the author of this blog, some many weeks later as I stated previously this is the worst depression, since the one labeled the “Great Depression.”
A serious flaw in the authors take is the fact that one can hardly ever compare same-to-same. Given the fact that the modern economy is substantially different than the American economy in the 30’s, unemployment at 18% is in structural terms as bad as the collapse of employment in the 30’s. Actually I will go further and state that an 18% unemployment rate is worse than those measured in the 30’s as most obviously the economy is far more highly intertwined, interdependent with far more safety breakers and obviously a far larger population.
Factually, given the many safety valves and conditions which seek to mitigate systemic risk, a comparison on such things must take this into account when comparing the severity of the current substantive financial collapse. As well, the on-going travails of Dubai speak to the highly integrated nature of Finance and Financial products. Should Dubai be unwilling and or unable to make payments is to suggest it as a precursor to another round of perhaps more substantial collapse by leveraged counties on their debt; which may cascade into other areas such as bond issuance and certainly an increase in VIX, and its modeling in the residential mortgage markets nee the various ABX indices. As Dubai is seeking a cessation of payment due on a bond in mid December, such a request does not speak well for the ability for on-going operations to pay for their debt load, and brings to mind the fact that there are many such leveraged entities out there.
Taken into account, this is by any measure the worst depression since the 30’s, and given the indebted nature of the consumer base, there is no quick recovery in sight. As well there is the fact that the aforementioned residential real estate market is in no manner establishing a base. Some 65% of the mortgages in Nevada are in a negative equity ratio; given the continuing collapse in employment, and with adjoining other states in similar straits, another round of decreasing prices and the potential for increased foreclosures is not hypothetical it is certain.
In the past and as people seek to mitigate damage through the spurious use of a change in language, the word depression does in fact come to correctly define the current state of the economy. The word “recession” came into usage as Washington sought to place a positive spin on a collapsing economy; mere marketing. Reminds me of the joke, when a neighbor loses his job its a recession, the week after when you lose your job its a Depression!