Wednesday, June 3, 2009

Worse than 1982?

The recession of 1981-’82 is frequently used as a benchmark for comparing today’s economic reports, such as the real gross domestic product released last week by the Bureau of Economic Analysis. Often overlooked is the fact that the 1981-’82 recession was closely preceded by a 1980 recession; the combination of the two is sometimes referred to as the “1980-’82 recession.”

The chart below graphs inflation-adjusted G.D.P. indexes for late 1979 through the end of 1982 (the blue series) and for mid-2006 through the first quarter of 2009 (the red series). Each point represents G.D.P. as a percent of the G.D.P. level three years before the given recession ended.

Because the downturn of the early 1980s was officially over by the last quarter of 1982, the blue series shows the dynamics of real G.D.P. for the three years (12 quarters) before the end of that recession. Real G.D.P. had its ups and downs in those three years, but by the end it was 0.3 percent lower than it was three years earlier.

The current recession is not over. But supposing that it ends in the third quarter of 2009, the red series provides a preview of the analogous calculation for 2008-’09. The red series shows how in the late 2000s G.D.P. rose significantly for much (but not all) of the three years before the end of the recession.

By contrast, the early 1980s (blue) series shows two recessions in the three years before the downturn’s end. In a sense, the 1981-’82 recession damaged an economy already tender from the 1980 recession. Measured from the start of the first recession, the early 1980s recession lasted 34 months whereas this recession is so far “only” 17 months old.

The usual comparisons of the current recession to 1981-’82 are based on the worst two to four consecutive quarters, without regard for the other activity near and around that time. For example, the worst two quarters of this recession (so far) have seen G.D.P. fall 3.1 percent (from an index in the chart of 103.5 to 100.4) whereas the worst two consecutive quarters 1980-2 were late 1981 and early 1982, when real G.D.P. fell 2.9 percent.

Arguably, we would like to see real G.D.P. fall 3.1 percent rather than 2.9 percent in two quarters, as long as the former case had some other good growth quarters. The chart illustrates this idea: the red series (late 2000s) is consistently above the blue series (early 1980s) despite the fact that the red series has the greatest two-quarter descent.

We do not know for sure when this recession will end, let alone whether it will be soon followed by a second recession. The red series may well dip slightly below the blue series in the second quarter of 2009 but that does not change the fact that real G.D.P. growth in much of the late 2000s was better than it was in the early 1980s.

While the job losses, foreclosures, stock declines and other casualties of the current recession have been very painful, substantially more bad economic news is needed to make this recession worse than the downturns of 1980-’82, at least in G.D.P. terms.

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