Putting the Current Recession in Perspective
The media, as well as policymakers, are increasingly calling the current economic downturn the “worst since the Great Depression.” They are not necessarily saying that the economy is in a worse place than it was in, say 1975, when the unemployment rate peaked at 9.0 percent (roughly where it is today) and inflation hit 12 percent, or in the 1980s, when inflation peaked at over 14 percent and the unemployment rate hit 10.8 percent. The comparison of this recession to others centers on the steepness and breadth of the current decline relative to previous cycles. With the rate of decline slowing recently, we may be seeing some preliminary signs that the economy has hit an inflection point. With that in mind, let’s compare the current recession with those of the last 60 years.
The path of GDP, so far in this cycle, has been somewhat out of the ordinary, but to date it has not surpassed the 1973 recession in terms of length or total output lost. However, based on the current Blue Chip forecast (a compilation of 50 private forecasts), that could happen in the coming quarters. If the forecasts are correct, one characteristic of this recession that would make it unique will be the length of time it lasts. While the average Blue Chip forecast predicts that GDP will not decline as much as it did during the 1973 recession or the 1957 recession (only the more pessimistic forecasters have it surpassing the 1973 recession), it is not expected to bottom out until six quarters after the onset of the recession, longer than in any postwar recession.
It’s important to note that while all business cycles are inherently different, they typically share a common pattern: They begin with a recession period in which GDP growth is negative, move into a recovery period in which GDP growth ramps up above potential, and end with an expansion period in which growth settles back down to a more sustainable growth rate. At present, the recovery period of the current business cycle is forecasted to be considerably slower than is typical of previous cycles. That expectation may be partially a function of aggregating forecasts, but even the average of the ten most optimistic forecasts has GDP taking five quarters to fully recover. A recovery of that length would contrast sharply with the rapid recoveries we saw in 1957 and 1973.
The behavior of the labor market in this recession has also been strikingly poor when compared to previous recessions. Only the 1948 recession and the 1973 recession witnessed larger increases in the unemployment rate, but if the Blue Chip projections hold true, the current recession will eventually surpass those cycles as well. This recession is also unusual in that the labor market’s poor performance is forecast to continue for some time. In fact, the unemployment rate is not expected to peak until the first quarter of 2010, nine quarters after the onset of the recession. The labor market is also expected to recover at a slower pace than in previous business cycles. Currently, 94 percent of Blue Chip forecasters expect the unemployment rate to average 9.0 percent or higher in 2010.
One potential reason why labor market woes are expected to continue past the end of the recession is that an unprecedented number of the unemployed are reporting that their layoffs are permanent in nature. Over 80 percent of those losing jobs, either due to layoffs or the completion of a temporary job, currently view their job separation as permanent. That amounts to nearly 55 percent of all those who report they are unemployed, nearly 10 percentage points higher than at any other time since the series began in 1967. With temporary layoffs accounting for such a small share of those currently unemployed, dislocations in the labor market are likely to persist for a while, as workers need time to search for new jobs that match their current skill set or go through retraining that will allow them to switch professions.
To date, the current recession has been particularly painful. Although it has probably not yet surpassed the 1973 recession in terms of overall severity, if current forecasts prove correct, it is just a matter of time before it does. What may ultimately make the current downturn the worst since the Great Depression is the sheer length of time it is expected to persist and the slow pace at which the recovery is expected to proceed once the downturn comes to an end. That being said, it is important to note that forecasts often prove to be wrong, and GDP data is frequently revised, so the final picture of the current business cycle may look notably different than what is currently projected.