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 four blue bars).
- 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 decline in 1945-47 was very, 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.
Note: I made five changes to the original chart. First, I colored the current downturn green to distinguish it from the other post-war downturns. Second, I used the latest data for recent GDP (which show a slightly deeper decline than was expected when I wrote my original post; those data boosted the current downturn to the top, post-war spot). Third, I used revised figures for the earlier time periods; the resulting changes were small. Fourth, I corrected a dumb error in my original calculation of the GDP decline in the Great Depression (I originally used the sum of the annual declines, when the correct figure uses compounded figures; this error is particularly dumb, since I had the correct figure in an adjacent cell in my spreadsheet). Fifth, I added the downturn of 1945-47.