Quarterly Update: The Recession in Historical Context

June 5, 2009
Paul Swartz
Analyst, International Economics
pswartz@cfr.org

How does the current economic and financial downturn match up to past contractions? This chart book provides a
series of answers, plotting current indicators (in red) against the average of all post–World War II recessions (blue).
To facilitate comparison, the data are centered on the beginning of the recession (marked by “0”). The dotted lines
represent the most severe and the mildest experiences in past cycles. Because the current downturn is frequently
compared to the Great Depression, the appendix plots the current recession against the 1930s.

Leo Tolstoy famously said, “Happy families are all alike. Every unhappy family is unhappy in its own way.” So it is
with downturns. Unlike most postwar recessions, this one stemmed from an asset market correction that destroyed
savings and froze the credit system. The result has been more severe than a typical recession, as these charts show.

Four things to look for in this update:

• Financial markets have dramatically improved, but from an extremely low base. Rather than pricing in
disaster, they anticipate tough times ahead. For example, the charts on the spread for AAA and BAA bonds
show the credit market moving from unprecedented panic to a level of fear that is merely in keeping with the
worst experiences since 1945.
• Real economy indicators show signs of stabilization. See in particular the charts on manufacturing sentiment,
nonfarm payrolls, oil prices, and car sales. Nonetheless, many of these indicators remain worse than anything
hitherto experienced in the postwar period.
• The collapse in the federal government’s finances is unprecedented, raising questions about how the
government deficit will be brought under control.  
• By most measures, the current recession is far milder than the Great Depression. But the appendix shows
that house prices have recently fallen much more sharply than in the 1930s.  
 
 
 • The year-over-year fall in
real gross domestic
product (GDP) is now
competing to be the worst
in the postwar period.

• The federal budget has

deteriorated far more
rapidly than in any past
recession, in part due to
the first economic
stimulus and bank
bailouts.
• The current stimulus
implies an even larger
and more prolonged
deficit in the future.

• Global trade collapsed in

the fourth quarter of
2008 and first quarter of
2009 in a way never seen
in the postwar era.
 • World trade growth
Unemployment initially
tends to slow
increased at a as
ratethe US
economy
consistentcontracts.
with past
• recessions.
Leading indicators
suggest a sharp
• However, the latest data
contraction
show the worst of trade
laborin
the fourth
market quarter
in the postwarand
early
period.nex t year.
• Will the policy makers
respond by liberalizing
trade
Note: The or introducing
prior new
edition of the chart
book showed change in
restrictions?
unemployment year over year. This
presentation shows the
unemployment rate relative to the
start of recession.

• The fall in nonfarm

payroll shows rapid
deterioration in the
labor market.
• The deterioration has
slowed, but will this
improvement be enough
to slow knock-on
effects?

• A rise in oil prices is typical

before the start of a
recession, and a fall is
typical as a recession
proceeds.
• This time oil prices initially
continued to rise after the
onset of the recession.
• Conversely the recent fall
has been larger than usual,
even allowing for the
rebound in the spring.
• The recent fall has
dramatically changed the
geopolitical position of oil
exporters.
 • Industrial production
(IP) held up well when
the recession began but
collapsed in the second
half of 2008.
• The current collapse is
creating a new postwar
record.

• The ISM survey offers a

forward-looking
indicator of industrial
production.
• A number above 50 in
the ISM survey implies
manufacturing growth
whereas a number
below 50 implies
contraction.

• Auto sales typically fall by

20 percent in a recession.
• This time around they
have fallen by over 40
percent.
 • Consumer sentiment
typically starts falling
before the recession
begins, but turns around
soon after.
• However, pessimism
seems particularly strong
this time.

• Most post–World War II

recessions were preceded
by a tightening of
monetary policy. This one
was not.
• Easing started sooner and
happened faster than is
typical.
• Although the Fed’s
ammunition in nominal
target rate cuts is gone, it
has continued to ease in
other ways.

• The spread of investment-

grade debt— a measure of
the risk that high-quality
corporate bonds will
default— typically rises
during a recession.
• The rise during the current
cycle is unprecedented.
• The credit markets’ recent
improvement still leaves
spreads at historic highs.
 • The spread on BAA debt
(the lowest investment
grade rating) is an indicator
of the risk that lower
quality companies will
default.
• The recent rise in the BAA
spread is unprecedented.
• As the financial system has
stabilized, the credit
markets have improved, but
the current implied default
rates suggest a rough
period for corporations.

• Equity markets start to fall

nearly eight months before
a recession begins.
• In this cycle, a fall in equity
markets preceded the
recession. However, the
subsequent fall has been
larger than normal, and the
markets have not recovered
on schedule.

Appendix: The Current Recession Compared to Prewar Average and the Great Depression

The economic cycle framework can be used to compare the current downturn to prewar recessions and the Great
Depression. The thick red line represents the current recession; the thin blue line, the postwar average; the thick
green line, the Great Depression; the thin orange line, the prewar average.

Remember these are not projections but simply an attempt to present the current economic environment in
historical context.
• Due to financial system
deleveraging, the
economy is enduring
uncomfortably low
inflation.
• The current recession
looks more like a prewar
recession than a postwar
recession or the Great
Depression.  

• Production in this
cycle has collapsed
relative to the postwar
average, but is in line
with the prewar
average.  
• The current collapse
does not compare to
that of the Great
Depression.  

• Although the labor

market has
deteriorated more
than at any time since
World War II, it is
much healthier than
during the Great
Depression.  
• U.S. trade—the sum of
exports and imports—
has collapsed
dramatically. But it will
have to deteriorate
further to compare to
the Great Depression.  

• Government
intervention is much
less controversial than
prior to World War II.
Thus government
stimulus occurred
faster than was the
case during the Great
Depression.  
• Government net
financial investment
(bank bailouts) has
contributed a
substantial portion of
expenditures.  

• So far, equity market

performance has lined
up with the Great
Depression.  
• One area in which this
downturn has been far
worse than the Great
Depression has been
in home prices.