Is This the Worst Economy since the Great Depression?
Data indicates that we are in the midst of the worst economic downturn since the Great Depression of the 1930s. But is this true? And more importantly, how did we even get to the point where we have to ask?
During the past thirty years, we have had four significant recessions starting about 1980, 1991, 2000, and 2008. Economists define "recessions" as two consecutive quarters with negative growth in Gross Domestic Product (GDP). An alternative definition recognizes an increase in the unemployment rate of 1.5% within 12 months. A severe recession with a decline of 10% of GDP or one that is prolonged for 3-4 years can be considered a "depression." Expansion and contractions reflect the normal business cycle that underlies the national economy. While politicians do seek to minimize these swings, they are rarely successful.
The Bureau of Labor Statistics and Congressional Budget Office provide data. In 1980, the national unemployment rate was slightly above 6%. The general malaise, period of high inflation, and increase in petroleum costs precipitated by the Iran hostage crisis are credited with causing this downturn. By 1981, unemployment had climbed to just below 8%. It rose through 1982 to 9%. By 1983, it had reached 10% and exceeded 11% before it started to decline later in the year. By 1984, the rate had dropped to below 8%. A gradual decline allowed the unemployment rate to reach 5.5% by 1990. So the unemployment rate rose over 5% points within three years, which is a severe recession. Keep in mind that employment is a trailing statistic -- the public sees this as the most critical indicator of economic vitality.
The recession of the early 1990s was precipitated by the savings and loan failures and the First Iraq War. The 1990s recession had a rise of unemployment from 5.5% in 1991 to 7% in 1992, then to 8% in 1993. A total rise of 2.5% was reversed steadily until 2000, whereupon the unemployment rate stood at 4% due to new technology. For two decades, an unemployment rate of 6% was considered steady. The "steady state" or full employment level is the point at which the loss of jobs in the national economy is balanced by the gain of new jobs.
The recession of 2000 started as the "technology bubble" burst and the unemployment rate of 4% rose to 4.5% in 2001. When the September 11 attacks occurred, the second dip resulted. By 2002, the rate was climbing to 6% and exceeded 6% through 2003, but it started to decline through 2004 to 5.5%. Through 2005 the rate fell to 5% and continued to drop to 4.5% in 2007. The total rise was over 2% within two years.
Bank liquidity problems and the real estate market decline caused the present downturn. In 2008, the rate edged up slightly to just below 5% but started a steeper rise in 2009 when it was 5.5%, approaching 10% as 2010 began. Throughout 2010 it edged just above 10% and has since oscillated around 9%. The unemployment rate has not reached the level of 1983, but the total change is greater, with a 5.5-point increase. The steepness of the rise approaches that of the 1930s.
A downturn can be viewed through stock and bond market valuations. We can accordingly look at the S&P 500 Index, Dow Jones Industrial Average, AMEX, NY Stock Exchange, or the NASDAQ levels. The most severe and extended bear market in three decades is underway with valuations on the JDIA going from 14,000 in 2007 to 8,500 in 2009 and recovering to 12,400 in 2011. The NASDAQ, which stood at 5,000 in 2007, has not exceeded 3,000 since.
We may be entering a prolonged or "secular bear" market. The drop over a 999-day period in 2000-2002 was among the worst, with the DJIA going from 11,800 to 7,200, or a fall of 38%. The drop in 1973-74 of 45%, which lasted 695 days, was more severe, but with less recessionary affect. The 1987 market crash was the greatest since 1929, but the nation recovered relatively quickly. So the equities and bond valuations show great losses in this 2008-2011 period. The S&P 500 Index stands at 1,300 today, but it was at 1,450 in 2007. Similarly, bond valuations are relatively flat over this four-year period.
National household income has risen only 15% since 1980, while the GDP has increased 60%. The gap reflects inflation, which erodes national wealth. The national median household income stood at $45,000 in 1980. It dropped to $42,000 in 1983 but rose to $48,500 in 1989 before declining to $46,000 in 1994. It steadily rose to $53,000 by 1999, but then it fell to $50,000 by 2002. A small increase to $52,000 by 2007 with a subsequent fall to below $50,000, and now to $49,500, has left the nation with little net increase. Real loss in national wealth and purchasing power during this latest fall exceeds all downturns since 1980.
Purchasing power is linked to the dollar's value and inflation. During the Great Depression, the rate was negative or low, as deflationary pressures existed. The high inflationary rate of the 1978-82 period has not been reached since. It has averaged about 3% through most of the past thirty years. At this rate, prices double every 24 years, which robs national wealth. The increase in gasoline prices is a reflection of the devalued dollar.
The Great Depression started as a recessionary dip in 1929, but it worsened thanks to federal tax increases sponsored by President Hoover and the Smoot-Hawley Import Tariff in 1931 -- both of which led to the collapse in 1932. The Depression extended through the period of World War II until a complete recovery in 1949, when stock values and household incomes matched earlier levels. National debt soared due to increased federal spending. The unemployment rate, which was 4% in 1928, hit 8.5% in 1930, rose to 24% in 1932, and peaked at 25% in 1933. The rate dropped to 17% in 1936 but rose to 19% in 1938, falling to 17.5% in 1939 and ending in 1940 at 15%. The rate dropped to 5% in 1942 and hit 1.5% in 1944 as the war removed 16,000,000 from the workforce to become soldiers. New Deal policies did not end the Depression.
In 2009, Congress passed an $830B stimulus bill with minimal result. While an infusion of federal monies can shorten downturns, the resulting debt must be managed by the Federal Reserve, which expands the money supply, or the Treasury, which increases borrowing. Increased government regulation within the banking reform bill and health care reform causes lessened hiring among small businesses.
The Great Depression ended with the rise of consumer demand and expansion of the private sector after the War. Federal spending is increasing our debt with greater amounts of money paying interest rather than delivering services. Given the above data, it is fair to say that this recessionary period is indeed the most prolonged and the deepest since the Great Depression. Whether we can keep from sliding into a bona-fide depression this time around is anyone's guess.