Is U.S. Recovery Sluggish or Normal?
The airwaves are buzzing today over an Associated Press analysis of all the recessions since WWII and proclaims our current recovery “the feeblest economic recovery since the Great Depression.“
Dizzying statistics are being thrown around back and forth faster than election year political insults.
Is this recovery an exception to the rule? Or, is it normal for economic downturns in general?
The surprising answer is that it is normal. That answer comes from a simple look at a single number – Gross Domestic Product (GDP).
More important than that, though, is the look at GDP has implications for what we today can expect going forward and for understanding how effective government attempts to cure recessions are.
Analyzing Previous Recessions – A Different Approach
The average Joe on the street is clueless when a recession begins and ends. Even the experts can’t decide the rules among themselves.
There are many definitions for a recession, but the most commonly used is when GDP contracts two or more quarters in a row (6 months). Every recession The Fed has identified since WWII, and were talked about in the AP analysis, meets that criteria.
The most confusing part is when does a recession end? We normally think a recession ends when GDP starts rising again. By that criteria President Obama famously proclaimed the “stimulus” package cured the recession back in July of 2009. We’ve just been facing “headwinds” for the last 3 years.
The truth is that we are at the trough of the recession. We are at a turnaround point, not the end.
I propose a new term:
The amount of time until GDP rises back to its previous high
Rather than dig into a blizzard of statistics like the Associated Press did, lets look at GDP for just the four toughest recessions since 1929, including the Great Depression which the AP omits.
The Four Toughest Recessions Since 1929
The most under-discussed factor in a recession is it’s ‘depth’. That is, what is the maximum amount of contraction before GDP starts growing again?
How deep a recession goes is usually expressed as a percentage of contraction (% Drop) from its previous high. The ‘depth’ of the four recessions above are the red numbers. 1929 is the Marianas Trench of recessions.
1973 was the most severe recession since WWII until the crash of 2008. Take note that 1973 and the recession of 1937 look very, very similar. They both sank about the same amount and lasted about two years.
The biggest surprise, according to our new “recession duration” definition, is that we just emerged from the Great Recession at the end of last year.
2008 was a lot deeper than 1973 and 1937 and lasted twice as long. Makes sense, doesn’t it? The recession of 1973 was slower going in but faster coming out. The Great Recession was faster in and slower out.
The Great Recession doesn’t look very sluggish at all put into context with the other 3 severe recessions.
A Lesson from the 1930s
Most folks don’t know that there were two dips in GDP in the 1930s. The Great Depression occupied the first half of the 1930s until we finally emerged in 1936. But by 1938 we fell back into recession again; that one slightly deeper than 1973.
When FDR’s spending stopped, so did the recovery.
1937’s recession lasted 2 years and we emerged from it by becoming the worlds largest arms dealer in the buildup to WWII. Two years later the U.S. itself entered the war after Pearl Harbor.
In yellow highlighter above is marked GDP back in 1929 ($976B) and GDP in 1938 ($992B). 1938 is less than 2% higher than the GDP in 1929. After all the back-to-work projects, social program funding and other government “stimulus” spending we were barely better off than before; except the national debt had more than doubled!
That should sound very familiar to all of us… that is very similar to where we are right now in 2012 after 2008’s Great Recession!
The Great Recession appears to behave like any other recession of it’s depth. The closest example to it we have for comparison and for predicting the future going forward is the Great Depression of the 1930s.
The similarities between the Great Recession and the Great Depression are eerie:
- FDR came into office in the trough of a severe economic crisis not of his doing
- Barack Obama did the same
- FDR pushed Keynesian “stimulus” programs, social programs and federal regulations to fight it
- Barack Obama did the same
- Under FDR the GDP economy barely recovered and then stalled when the money ran out
- Under Obama exactly the same has happened
- FDR’s spending programs largely failed
- Obama’s spending programs largely failed to
Comparatively speaking, today’s economy is probably more like 1937 than 1938. We have just now emerged from the Great Recession just like America had from the Great Depression in 1937. And just like 1937, the “stimulus” money is spent, yet the economy remains weak and vulnerable.
We may be out of woods by GDP standards, but we are still very much into a jobs recession. There are 4+ million fewer jobs now than before the Great Recession. Unemployment is creeping up again.
Exact figures are not available online going back to the Depression of the 1930s, but in a PBS special it was reported that the recession of 1937 was called “Roosevelt’s recession” by his critics because unemployment was up again. Obama has to take ownership of this recession now because, like FDR, his programs have largely failed to fix things.
Keynesian macroeconomics can only do so much. It is not the cure-all some economists would have us believe. FDR proved that 75 years ago and Obama has proved it again today.
Keynesianism can only stave off greater economic calamity until the private-sector comes to the rescue.
The 1930s had WWII to generate enough private-sector growth to bail out the economy in 1939-40.
Short of starting another world war, America has to come up with a strong plan to generate enough private-sector economic growth to return us back to prosperity again.