Friday, January 16, 2009

How bad is the recession, really?

Pretty bad, right? Turn on the TV or pick up a newspaper and you'll quickly find people calling it the worst ever, another Great Depression, and so on. Gloom and doom are the order of the day. Unemployment is up. The stock market is down. As President-elect Obama and the House Democrats revealed their unprecedented $825-billion plan to stimulate the economy (that's on top of the $700 billion to bail out Wall Street, etc. etc.), no one seems to be confident that even that will work. Obama himself said today in Ohio that he doesn't have a crystal ball and things might get worse before they get better.

Fair enough, no one can predict the future and if you believed the economic forecasts made a year ago, you'd have been misled. But that doesn't mean that there are no hard numbers to get a fix on just how bad the current recession is. To provide a little perspective, the Federal Reserve Bank of Minneapolis has produced a set of graphs that show very clearly how this recession -- now in its 13th month, according to the National Bureau of Economic Research (NBEC) -- compares so far with past recessions through which many of us lived.

Two of these graphs are reproduced above. The one on top depicts total change in output (real gross domestic product) during the current and 10 prior recessions since World War II. Each bar represents the low point of each recession -- the point of deepest descent from the pre-recessionary peak output. You can see that the deepest recession was in 1957 with the 1973 and 1981 downturns bottoming out pretty far down too. In 2001, the economy barely dipped at its worst point. The bar for the current recession shows where we were at the end of the third quarter of 2008 -- when the economy was still pushing into positive territory, although not by much.

Of course, the fourth quarter of 2008, for which neither the Minneapolis Fed nor anyone else yet has data, isn't on the graph. That data will be out January 30, but most analysts are projecting a sharp drop of about 5% on an annualized basis. If correct, that would make the bar for the current recession plunge, possibly past the depth reached in 1957.

The second graph compares changes in GDP for the current recession, the harshest of the 10 recessions and the median for all 10 over time. You can see that output in the current recession -- again, tracked only through the third quarter of 2008 --was chugging along fairly nicely on a level path. In contrast, output in the harshest recession plunged rapidly during the first couple of quarters. Based on what we know about the fourth quarter of 2008, the red line would turn sharply downward.

Most economists also expect that that will not be the end of it, with at least two more quarters of contracting GDP in 2009.

So what does it add up to? A "mild" recession through the third quarter of last year, with the decline accelerating up to the present day. Beyond that, no one knows.

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