One of my first posts cautioned against comparing the current economic downturn to the Great Depression. Our economy is certainly in terrible shape, as Friday’s GDP data confirmed. Indeed, it’s the worst downturn since World War II. But it still pales in comparison to the horror of the Great Depression.
Since we received fresh data on Friday, it seems like an auspicious time to present a new version of my chart making this point:
The green bar is the current recession. Most forecasters expect the economy to grow, albeit tepidly, in coming quarters. If they are right, the estimated peak-to-trough GDP decline in this downturn is 3.9%. (If you believe that forecasters are too rosy, feel free to add on your own estimate of further declines in the quarters ahead.)
The chart has three main messages:
- The current downturn is the worst since World War II (the green bar is larger than each of the blue bars; together the green and blue bars represent the five largest post-war declines).
- The current downturn is a far cry from the Great Depression (the green bar is much smaller than the red bar). You would have to assume enormous further GDP declines to get anywhere near the stunning 26.7% peak-to-trough decline in GDP during the Depression.
- The economy contracted sharply (12.7%, the orange bar) after World War II. That’s why, from a GDP perspective, the current downturn is the worst since World War II (defined for these purposes as stretching to 1947), not the worst since the Great Depression.
Some caveats on interpreting the chart:
- Post-war data are available quarterly, but earlier data are available only annually. Thus, the data aren’t exactly comparable, but that doesn’t affect the main qualitative points.
- The chart excludes one major downturn: that of the late 1930s. After plummeting in 1929 to 1933, the economy grew briskly in 1934 to 1937, only to fall back into sharp decline. As noted, we have only annual data for this period; they indicate that GDP declined 3.4% from 1937 to 1938. My recollection is that the actual decline was much worse on a quarterly basis (mid-1937 to mid-1938), but those figures aren’t reported in the official BEA data.
- The decline in 1945-47 was very different from the other declines. It followed a period of exceptional, unsustainable, war-driven growth. A return to peace may have been temporarily bad for GDP, but it was good for the world, good for the nation, and good for the rest of the economy (e.g., consumer spending rose even as overall GDP fell).
- The declines cover periods of different length, ranging from two quarters (1957-58, 1981-82) to four years (the Great Depression). Some readers of my original post wondered whether that weakened the point I was trying to make. I don’t think so. The Great Depression was Great because of both its length and its severity. One way to capture that is to focus, as the chart does, on cumulative GDP declines.
- As discussed in a follow-up to my original post, one can think of other measures that might do a still better job of capturing both the length and severity of economic downturns. I haven’t done those calculations yet, but my guess is that they will make the current downturn look worse relative to other post-war downturns, and will make the Great Depression look even worse still.
- The current downturn may not be over. Forecasters have certainly been wrong before. As noted above, feel free to add your own forecast to the green bar, if you see fit.
- Finally, as noted in yet another related post, there are striking parallels between the run-up to the current crisis and the run-up to the Great Depression. As Merle Hazard put it: “a plane crash averted does bear some resemblance to a plane crash that happened.” So feel free to analogize the start of the crisis as being similar to the Great Depression even though the overall economic loss is (knock on wood) much smaller.
A few hours after my original posting, I also updated the chart and some text in this post to reflect a comment about 1937-38 (thanks Bill C).