The recession in historical context

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How does the current economic and financial downturn match up to past contractions?

In an attempt to present matters in historical context, Paul Swartz of the Council on Foreign Relations recently published a chart book showing that the current economic environment has been more severe than a typical recession. He specifically highlights the following four conclusions:

• Financial markets have dramatically improved, but from an extremely low base. Rather than pricing in disaster, they anticipate tough times ahead. For example, the charts on the spread for AAA and BAA bonds show the credit market moving from unprecedented panic to a level of fear that is merely in keeping with the worst experiences since 1945.

• Real economy indicators show signs of stabilization. See in particular the charts on manufacturing sentiment, non-farm payrolls, oil prices, and car sales. Nonetheless, many of these indicators remain worse than anything hitherto experienced in the postwar period.

• The collapse in the federal government’s finances is unprecedented, raising questions about how the government deficit will be brought under control.

• By most measures, the current recession is far milder than the Great Depression. But the appendix shows that house prices have fallen much more sharply than in the 1930s.

The charts below plot current indicators (in red) against the average of all post-World War II recessions (blue). To facilitate comparison, the data are centered on the beginning of the recession (marked by “0”). The dotted lines represent the most severe and the mildest experiences in past cycles. The last few charts specifically compare the current downturn with the Great Depression.

The year-over-year fall in real gross domestic product (GDP) is now competing to be the worst in the postwar period.


The federal budget has deteriorated far more rapidly than in any past recession, in part due to the first economic stimulus and bank bailouts. The current stimulus implies an even larger and more prolonged deficit in the future.


Global trade collapsed in the fourth quarter of 2008 and first quarter of 2009 in a way never seen in the postwar era.


Unemployment initially increased at a rate consistent with past recessions. However, the latest data show the worst labor market in the postwar period.


The fall in nonfarm payroll shows rapid deterioration in the labor market. The deterioration has slowed, but will this improvement be enough to slow knock-on effects?


Industrial production (IP) held up well when the recession began but collapsed in the second half of 2008. The current collapse is creating a new postwar record.


A rise in oil prices is typical before the start of a recession, and a fall is typical as a recession proceeds. This time oil prices initially continued to rise after the onset of the recession. Conversely the recent fall has been larger than usual, even allowing for the rebound in the spring. The recent fall has dramatically changed the geopolitical position of oil exporters.


The ISM survey offers a forward-looking indicator of industrial production. A number above 50 in the ISM survey implies manufacturing growth whereas a number below 50 implies contraction.


Auto sales typically fall by 20% in a recession. This time around they have fallen by over 40%.


Consumer sentiment typically starts falling before the recession begins, but turns around soon after. However, pessimism seems particularly strong this time.


Most post-World War II recessions were preceded by a tightening of monetary policy. This one was not. Easing started sooner and happened faster than is typical. Although the Fed’s ammunition in nominal target rate cuts is gone, it has continued to ease in other ways.


The spread of investment-grade debt – a measure of the risk that high-quality corporate bonds will default – typically rises during a recession. The rise during the current cycle is unprecedented. The credit markets’ recent improvement still leaves spreads at historic highs.


The spread on BAA debt (the lowest investment grade rating) is an indicator of the risk that lower quality companies will default. The recent rise in the BAA spread is unprecedented. As the financial system has stabilized, the credit markets have improved, but the current implied default rates suggest a rough period for corporations.


Equity markets start to fall nearly eight months before a recession begins.
In this cycle, a fall in equity markets preceded the recession. However, the subsequent fall has been larger than normal, and the markets have not recovered on schedule.


The last few charts compare the current recession with the prewar average and the Great Depression.

The thick red line represents the current recession; the thin blue line, the postwar average; the thick green line, the Great Depression; the thin orange line, the prewar average.

Due to financial system deleveraging, the economy is enduring uncomfortably low inflation. The current recession looks more like a prewar recession than a postwar recession or the Great Depression.


Production in this cycle has collapsed relative to the postwar average, but is in line with the prewar average. The current collapse does not compare to that of the Great Depression.


Although the labor market has deteriorated more than at any time since World War II, it is much healthier than during the Great Depression.


US trade – the sum of exports and imports – has collapsed dramatically. But it will have to deteriorate further to compare to the Great Depression.


Government intervention is much less controversial than prior to World War II. Thus government stimulus occurred faster than was the case during the Great Depression. Government net financial investment (bank bailouts) has contributed a substantial portion of expenditures.


So far, equity market performance has lined up with the Great Depression.


One area in which this downturn has been far worse than the Great Depression has been in home prices.


Source: Paul Swartz, Quarterly Update: The Recession in Historical Context, Council on Foreign Relations, June 5, 2009.

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