Back in March, I wrote a piece entitled, "Overall economy not as bad... relatively" in which I graphically compared the current U.S. recession with the previous 13 recessions including the Great Depression. In that post, I concluded that the recession at that time was not the biggest since the Great Depression. This current post presents updated graphics and provides evidence that this is now the biggest U.S. recession since the big one at the beginning of the 1930s.
The graphic above shows U.S. nonfarm employment in each of the last 14 recessions as a percentage of its peak level at the beginning of each recession. What was not the case at the time of my previous post in March and is now the case is that the U.S. labor market has declined further (more than 4%, or 4.4 million jobs) than any other recession after 14 months. The only recession that looks like it was worse, other than the Great Depression (black line), was the period from 1945 to 1948 (the dark green line for 1943-1949) that represented the reduction of government spending after the end of World War II. Another ominous sign in our current recession is that it is not clear that the job losses are decelerating. That is, we are still losing over 500,000 per month.
The comparison of real GDP across recessions, shown in the chart below, now tells a similar story to that of employment. Having declined more than 3% in 9 months, our current recession is second only to the Great Depression in terms of production losses. Many economists are now predicting that the current recession will end before the end of the year, including Federal Reserve Chairman Ben Bernanke. At its meeting in the end of April, the Federal Open Market Committee cited signs that consumer spending had firmed up. However, it is not clear to me how long-lived these consumer signs of strength might be given the continued deterioration of the labor market.
Lastly, I wanted to show an updated graph of the stock market (Dow Jones Industrial Average). The Dow has been stable in the low 8000s since the end of April. The chart below shows that the Dow is still in record-decline territory--with the exception of the 1930s--being currently down 40% (May 29, 2009 close of 8500.33 versus October 9, 2007 close of 14164.53). I do think that financial markets have now stabilized, but it is not clear how soon stocks will return to their old returns of 8% per year. And even if they do, it will be a while before we get back to Dow 14000.
Taken together, these pictures of employment, real GDP, and the stock market tell me that our current recession is now the biggest since the Great Depression. The stock market seems to have stabilized, but it is not clear that employment and production losses are slowing down. I hope that the Federal Reserve is right that production will start growing again before the end of the year, but I think it is more likely in early 2010 given the current remaining weaknesses in the economy.
The comparison of real GDP across recessions, shown in the chart below, now tells a similar story to that of employment. Having declined more than 3% in 9 months, our current recession is second only to the Great Depression in terms of production losses. Many economists are now predicting that the current recession will end before the end of the year, including Federal Reserve Chairman Ben Bernanke. At its meeting in the end of April, the Federal Open Market Committee cited signs that consumer spending had firmed up. However, it is not clear to me how long-lived these consumer signs of strength might be given the continued deterioration of the labor market.
Lastly, I wanted to show an updated graph of the stock market (Dow Jones Industrial Average). The Dow has been stable in the low 8000s since the end of April. The chart below shows that the Dow is still in record-decline territory--with the exception of the 1930s--being currently down 40% (May 29, 2009 close of 8500.33 versus October 9, 2007 close of 14164.53). I do think that financial markets have now stabilized, but it is not clear how soon stocks will return to their old returns of 8% per year. And even if they do, it will be a while before we get back to Dow 14000.Taken together, these pictures of employment, real GDP, and the stock market tell me that our current recession is now the biggest since the Great Depression. The stock market seems to have stabilized, but it is not clear that employment and production losses are slowing down. I hope that the Federal Reserve is right that production will start growing again before the end of the year, but I think it is more likely in early 2010 given the current remaining weaknesses in the economy.
