The following three graphs brought me to the conclusion that changed my perspective on the relative size of our current recession in the United States. You often hear that the current recession is the most severe since the Great Depression. However, when you actually go to the data, that is only the case if you look exclusively at the financial sector.
The normalized peak plot above charts real GDP as a percentage of its peak value at the beginning of the last 14 recessions from the Great Depression (thick black line) until our current recession (thick lime green line). Real GDP in the U.S. has only been declining since Q2 2008, even though the recession officially began in December 2007. And real GDP is only down 1.7% from its peak right now. From the picture, it is clear that this is not yet the worst recession since the Great Depression in terms of GDP. But if GDP continues to decline for five more quarters as I have been predicting, then the current recession will likely pass all others since the Great Depression in severity. However, I do not think we will match the Great Depression in severity nor will we match the WWII recession (1945) in its duration.
Another key macroeconomic variable that has been getting a lot of press is U.S. job losses. The picture below shows a normalized peak plot of nonfarm employment as a percentage of its peak at the beginning of the past 14 recessions. This picture tells essentially the same story as the normalized peak plot for real GDP. In terms of employment, our current recession is still in the middle of the pack in terms of percentage of jobs lost since the peak--down 3.2%. Similar to the interpretation of the real GDP picture, I think the employment situation will get worse, eventually passing the magnitude of the early 1980s recession but probably not passing the WWII recession (the lone low green line). I made this comparison in a table in a previous post.
The last picture, which has been widely publicized in various forms, shows that the Dow Jones Industrial Average index of stock prices is clearly the lowest in percentage-of-peak terms since the Great Depression. I originally showed this picture of the DJIA in a previous post. The Dow closed last Friday at 6,547.05, down 53% from its peak closing price on October 9, 2007 of 14,164.53. It closed today at 7,170.06, down 49% from the peak. This tells me that this recession is focused in the financial sector. A large portion of the national media is located in New York City--the financial center of the U.S.--which clearly looks like a bloodbath right now. But the overall economy is not hemhorraging as badly as the financial sector. This was news to me.
In summary, our current U.S. recession is not yet the most severe since the Great Depression. But if forecasts of the recession continuing for another year are correct, then it will likely become the most severe since the Great Depression. However, it is important to note that the extreme losses in the financial sector are not spilling over equally into the rest of the economy. Although the situation is currently bad, it has been and could be worse.
Another key macroeconomic variable that has been getting a lot of press is U.S. job losses. The picture below shows a normalized peak plot of nonfarm employment as a percentage of its peak at the beginning of the past 14 recessions. This picture tells essentially the same story as the normalized peak plot for real GDP. In terms of employment, our current recession is still in the middle of the pack in terms of percentage of jobs lost since the peak--down 3.2%. Similar to the interpretation of the real GDP picture, I think the employment situation will get worse, eventually passing the magnitude of the early 1980s recession but probably not passing the WWII recession (the lone low green line). I made this comparison in a table in a previous post.
The last picture, which has been widely publicized in various forms, shows that the Dow Jones Industrial Average index of stock prices is clearly the lowest in percentage-of-peak terms since the Great Depression. I originally showed this picture of the DJIA in a previous post. The Dow closed last Friday at 6,547.05, down 53% from its peak closing price on October 9, 2007 of 14,164.53. It closed today at 7,170.06, down 49% from the peak. This tells me that this recession is focused in the financial sector. A large portion of the national media is located in New York City--the financial center of the U.S.--which clearly looks like a bloodbath right now. But the overall economy is not hemhorraging as badly as the financial sector. This was news to me.In summary, our current U.S. recession is not yet the most severe since the Great Depression. But if forecasts of the recession continuing for another year are correct, then it will likely become the most severe since the Great Depression. However, it is important to note that the extreme losses in the financial sector are not spilling over equally into the rest of the economy. Although the situation is currently bad, it has been and could be worse.
