Taking a Measure of Today’s Economy

We know that our economy is struggling, but how does it compare to recessions of the past? A number of economists, politicians and journalists have told us that this is the worst environment since the Great Depression that began in 1929. Is that truly the case?

That may be a matter of perception. Nobody should downplay the seriousness of the current recession. Yet it is clear that this is far from the level of decline experienced when the U.S. was in the throes of the 1930s depression. Forty to 50 years later, the 1970s and 1980s brought extreme and unusual economic challenges.

HOW WE MEASURE A RECESSION

There are different ways to define a recession. A common definition is that it is represented by two consecutive quarters of a decline in the nation’s Gross Domestic Product (GDP), the primary measure of economic output of goods and services over a given period. The problem with this definition is either that a recession will be well underway, or possibly even completed, before you know that it happened. The first estimate of GDP growth for a calendar quarter is not reported until the end of the first month after the quarter is completed. What’s more, in 2008, after a modest decline in the first quarter, GDP rose in the second and third quarters, then declined dramatically in the fourth quarter. By that definition, it was not yet possible in mid-April 2009 to identify if the U.S., in fact, was in a recession.

But more economic forecasters are now beginning to accept the findings of the National Bureau of Economic Research (NBER), a nonprofit organization of economists who study economic trends and place start- and end-dates on economic cycles. While GDP remains as a prime measurement tool to determine if the economy is in a recession or growing, other factors are considered as well. These include real personal income, employment, industrial production and wholesale and retail sales.

The NBER dates the current recession all the way back to December 2007. In that time, we have seen some growth in GDP, but through the end of 2008, the economy, for the entire period, declined by 0.8 percent based on GDP. It was likely headed lower, based on GDP data for the first three months of 2009. That could well bring the decline in the nation’s Gross Domestic Product to more than 2 percent during the current recession.
By comparison, Real (inflation-adjusted) GDP dropped by 3.1 percent during the 1973-75 recession and by 2.7 percent through the 1981-82 recession (according to NBER date compiled by the Federal Reserve Bank of Minneapolis).

During those earlier periods of significant economic decline, inflation was creating severe problems. The Consumer Price Index (as measured by the U.S. Bureau of Labor Statistics) rose by a peak of 12.2 percent in 1974 and by more than 14 percent in 1980. By comparison, the inflation rate in 2008 was just 1.5 percent.

Job losses were significant as well in the mid-1970s and early 1980s. The unemployment rate topped out at 9 percent in 1975 and hit 10.8 percent in 1982 (according to the Bureau of Labor Statistics). Only after 15 months of the current recession did unemployment top the 8 percent level—though unemployment rates are a lagging indicator and tend to remain high or even continue upward as economic recoveries begin.

What does seem likely is that the current recession will be one of the longest lasting in the post-World War II era. Through March, the current recession had lasted 16 months. That matches the length of the 1973-75 and 1981-82 recessions. It is important to keep in mind that in both of those cases (as with all recessions in our history), the economy regained its footing. While two recessions occurred after 1982 and prior to 2007, both were considered mild by historical standards.

WHAT IT MEANS TO YOU

As an investor, you need to maintain a clear perspective on today’s environment as you make your plans for the future. The U.S. economy has come a long way since the depths of the Depression in the 1930s. History tells us that over time, recessions come to an end and economic growth resumes. You need to make adjustments to current economic realities while you stay prepared for the inevitable economic recovery. Working with your financial advisor is a great step toward making a financial plan for the future and feeling more in control of your financial picture.

AJ Jugan and Brian Stumpf are financial advisors and Certified Financial Planner™ professionals. Andrew (AJ) can be reached by calling 412-635-5813 or emailing andrew.m.jugan@ampf.com. Brian can be reached by calling 724-799-2782 or emailing brian.d.stumpf@ampf.com.