Friday, October 14, 2011

The Severity of The Recession

The odds and predictions of another recession have changed so often that it is hard to say what the outcome will be.  One thing is clear this has been the longest recession since the Great Depression.  Many have referred to it as the Great Recession for the economic period that begun in December 2007 and ended in June 2009 according to the National Bureau of Economic Research

Some analysts argue that we are not headed towards a double dip recession since the economy never actually came out of the recession as of this date.  Whether the economy will head towards slow growth or a double dip is up for debate.  Just a few weeks ago the market was trading as if we were headed towards another economic calamity.

Before letting the sky fall and before investors start selling securities at the slightest worry lets compare how the Great Recession measures up to the Great Depression.

The Great Depression started in 1929 and it lasted a decade.
The Great Recession started in 2007 and it lasted 18 months.

From 1930 to 1931 GDP decreased by 16% compared to a 6.2% decrease from 2007 to 2008.

At its peak the unemployment level reached 24.9% in 1933 compared to 9.5% in June 2009 although it did top 10% in October 2009.  In 1933 about 4,000 U.S. banks closed compared to 25 U.S. banks closing in 2008.

One thing to consider is that during the 1920's even when the economy was doing well unemployment was fairly high as a result of technological improvements that increased manufacturing productivity.  Currently unemployment hovers above 9% leaving Americans in uncharted territory.  The prolonged length of time that the unemployed have endured has not been witnessed since World War II.

The Dow Jones fell about 89% between September 1929 through July 1932 compared to the near 50% drop in the Dow Jones from December 2007 through March 2009.  Close to 7 trillion dollars in wealth vanished from the U.S. stock market in the 2007 recession.

As the Depression deepened in 1932 President Hoover decided to raise taxes, cut spending and raise interest rates. Unpredictable currency rates and tariffs brought world trade to a halt which made the situation a nightmare.  In Contrast during the 2007 recession the Federal Open Market Committee lowered interest rates and is expected to leave them at the near zero rate until the middle of 2013.  The present government also implemented stimulus packages and cut taxes to boost the economy.

After World War II there has consistently been at least one recession per decade ranging from mild to long in average.  Recessions before the Great Depression lasted about 20 months, recessions after the depression have averaged about 10 months in length.  On the other hand the 2007 recession lasted 18 months. 

The Great Recession may not come close to the economic catastrophe lived in the 1930's but it did out due every other recession after the depression.  Perhaps that memory is still very vivid in people's minds and they fear a double dip even when the economic data points to slow growth.

No comments:

Post a Comment