I was sent this article yesterday by my good friend and financial planner, Tom Steelman.  It was very nice to get this type of real data comparing today’s economy and other recessions in U.S. history.  I have held the belief, and blogged on it several times, that the media is telling a different story because of it’s propensity toward “if it bleeds, it leads” modality.  I hope you enjoy this as much as I did and find it encouraging to know that the sky is not falling.

      A Brief History of US Economic Crises: 1929-Present

Introduction

Invariably, during times of severe economic crisis, comparisons to other gloomy periods are made in order to give investors, consumers, prognosticators et al. a baseline with which to measure the latest downturn. It is only natural to speculate as to when a given economic crisis or recession will end, and wonder how severe it will ultimately become.

Economic crises are not a new phenomenon; they have pervaded the US economy since the formation of our nation. While they vary in size and scope, they also vary in cause, length, and magnitude. While no two have been alike, one factor that they share is that they have all ultimately ushered in a new age of economic growth and prosperity of varying length—hopefully with many lessons learned.

The credit and housing crises our economy has been mired in since 2007, and the resulting market fallout, is arguably the most serious we’ve faced in decades. While recent recessions and market pullbacks have usually been compared to either the oil crisis/bear market of 1973-1975, or the stagflation/high unemployment of 1980-1982, the current recession (which the National Bureau of Economic Research recently determined began in December, 2007) has evoked images of perhaps the darkest economic period in US history—The Great Depression. This Commentary will briefly compare and contrast those 3 crises with the current one.

The Depression — Overview

The Great Depression is the ultimate benchmark for US economic crises; it is a benchmark primarily because of its length and the magnitude of its destruction, in terms of wealth, employment, and confidence. What officially began in 1929 (following the great stock market crash) spanned a total of nine years and two deep recessions (1929-1933 and 1937-1938).

The causes of the Depression have been debated for years. While there are differing schools of
thought, many now agree that what began as a mild recession prior to the stock market crash of 1929 was exacerbated following the crash. Initially, the Fed lowered interest rates, customarily seen as the proper course of action during a recession; but, when the situation did not improve, the Fed changed course, and began raising rates and constricting the money supply. There were also no efforts toward fiscal stimulus, and the combination ultimately led to a run on the banks, bank failures, deflation, and the lack of a functioning credit market.

The situation became so dire that checkwriting became a thing of the past, and most transactions that were not bartered were executed in cash. As conditions deteriorated, unemployment soared to nearly 25%, a figure that would have arguably been significantly higher if measured in the same manner it is today. Deflation ran rampant, and prices of nearly everything plummeted. The icing on the cake - the Smoot-Hawley Tariff Act of 1930 - significantly raised tariffs on US imports, and foreign governments retaliated with high tariffs on exported US goods. This brought free trade to a halt, and in all likelihood, extended the ultimate length of the Depression

The Depression vs. Today – Market Comparison and Contrast

There are very few parallels between the current economic crisis and the Great Depression, despite what some talking heads and pundits suggest. While the modern-day stock markets have fallen dramatically and quickly, they still have a long way to go in order to rival the 91% drop in the Dow Jones Industrial Average that occurred over a three-year period through 1932. Nor are there any meaningful similarities between the incredible pre-crash run-up in stock prices from 1921 until 1929 (during which the Dow rose nearly 500%), and the most previous modern most recent run-up (from 2002 until October 2007) when the Dow rose 94%.

The Depression vs. Today – Unemployment and Banking Comparison and Contrast

While the modern-day unemployment rate has been increasing, the current rate of 6.7% is a far cry from the 24.9% seen at the height of the Depression. While, according to the FDIC there have been 23 bank failures so far in 2008, there were 659 in 1929, 1350 in 1930, and more than 9800 from 1929 through 1934. Runs on banks, common during the Depression, are all but a thing of the past, primarily due to the backstop provided by the Federal Deposit Insurance Corp (FDIC).

The Depression vs. Today – Government Action Comparison and Contrast

Perhaps the biggest difference between the Great Depression and the current crisis is the active role that the government and Federal Reserve play today, versus a much more hands-off approach taken by the Hoover Administration at the onset of the Great Depression. Countless bailouts, loans, interventions, and rate cuts carried out by the Treasury or Federal Reserve demonstrate the vastly more active approach taken by policymakers today. None of these actions guarantee a swift end to the crisis, nor do they come without potential fallout in the future, but they do demonstrate an effort to avoid monetary and fiscal mistakes made in the past.

The Depression vs. Today — Similarity

One potential similarity between the 1930s and now is that both crises were fueled—and perhaps exacerbated—by a lack of confidence among investors and bank depositors. While this problem is difficult to rectify, the communication tools available today greatly exceed those of the 1930s; ultimately, confidence should be more easily restored today. Still, this too is a double-edged sword, due to the propensity of the media to paint a very grim picture when times are tough, and an overly optimistic picture when times are good.

The 1970s vs. Today – Market Comparison and Contrast

The bear market of 1973-1974 saw the Dow Jones Industrial average lose 45 percent of its value in less than 23 months. While the magnitude of this drop is similar to what we’ve recently experienced, the recent fall occurred in a much tighter timeframe as the Dow plunged 42% in a six-month period—from May until November 2008. This experience has left modern investors shaken, and is much more severe than what occurred in 1973 and 1974.

The 1970s vs. Today – Inflation Comparison and Contrast

Beginning in 1973, a somewhat new and frightening concept to many Americans - inflation – asserted itself. After averaging about 3.3% annually during the previous 10 years, inflation spiked to 6.2% in 1973, 11% in 1974, and 9.1% in 1975. The US had not experienced rising inflation to this extent since the post-war years of 1946-1948, but unemployment during those years was typically under 4%, whereas in 1973-75 it ranged up to 9% (see below). All these factors presented a quadruple whammy to 1970s America: high unemployment, rising prices, an energy crisis, and turmoil at the highest levels of our government.

While rising inflation was a concern during 2007 and early 2008, much of it was caused by rising
commodity prices, namely fallout from skyrocketing oil prices. Since then, as our economy has
weakened, nearly all commodity prices have fallen sharply. The fear of inflation has, in the near term, given way to fear of deflation—a concept foreign to most Americans and one that we have not experienced since the Depression.

The 1970 vs. Today – Unemployment Comparison and Contrast

In November of 1973, the unemployment rate stood at a rather benign 4.8%, very close to the 5.0% recorded in December 2008 (the official beginning of the current recession). One year later, in November 1974, unemployment had risen to 6.6%, also very close to the 6.7% rate recently announced in November 2008. The rate continued to rise until May 1975’s 9.0% (two months following the end of that recession) before slowly falling below 8% by January, 1976. While it is impossible to accurately predict what the height of unemployment will be during the current recession, there are certainly eerie similarities between the ‘73-‘75 recession and the current period—at least in terms of unemployment.

1980-1982 — Stagflation

By late 1979, unemployment had fallen below 6% once again, but a short recession from January through July, 1980 saw the jobless rate creep back up toward 8%. And another enemy had also resurfaced: inflation. By 1978 it had hit 7.6%. The next year, it jumped to 11.3%, on the road to a 33-year high of 13.5% in 1980. But this was not just any garden variety of inflation, it was “stagflation”. Stagflation occurs when high inflation and economic stagnation occur simultaneously, and it began in the wake of the energy crisis of 1979.

Although not as severe as the 1973 energy crisis, the 1979 version came amid a revolution in Iran and major tensions in the Middle East, including the taking of American hostages in Iran and a war between Iran and Iraq.

As the economy worsened, unemployment breached the 8% mark by late 1981, and hit 10.8% by November of 1982. In fact, from November 1982 until June 1983, there were 10 consecutive months of 10%+ unemployment—including 7 months after the recession “officially” ended in November, 1982.

1980-1982 vs. Today — Banking Comparison and Contrast

The 1980-1982 period was also marked by a banking crisis, although not as severe as the current version. Following a wave of deregulation, banks were able to lend money more broadly beginning in 1980. As the economy worsened and defaults mounted, banks began to fail at alarming rates. Meanwhile, the Savings and Loan industry was also suffering at the hands of the worsening economy, leading to hundreds of failed S&Ls. One major difference between that period and now is  the credit crisis we currently face—which was not much of an issue in the early 1980s. Credit was available, but interest rates were extremely high. Today, credit is seemingly not available, but interest rates are extremely low.

1980-1982 — Government Action Comparison and Contrast

The Federal Reserve played a huge role in the early 1980s economic crisis as Fed Chairman Paul Volcker raised interest rates substantially in order to put the brakes on rampant inflation. Volcker raised the Fed Funds rate to as high as 20% in 1980, and for all intents and purposes took the country into recession in order to tame inflation. Today’s Federal Reserve has also been very active, arguably even more active than Volcker’s Fed. One of the major differences, however, is that current Fed Chairman Bernanke has been lowering interest rates—all the way down to 1%–in order to encourage lending.

1980-1982 vs. Today — Market Comparison and Contrast

Peak to trough, the Dow fell 24% during the 81-82 recession, and recovered substantially from mid-1982 on. This represented a much more benign stock market environment than what we’ve
experienced so far in 2008, with a six-month Dow drop of 42% through November.

Conclusion

The “this time it’s different” sentiment that has permeated opinions on the current economic crisis may indeed be valid. However, the same statement could have applied to many other such periods that we have faced. Each, as evidenced by the circumstances surrounding the Great Depression, the 1973-1975 bear market, and the 1980-1982 stagflation era, has brought with it a unique set of challenges that have combined to create very difficult economic circumstances. No two of these have been alike.

Despite a rather gloomy near-term outlook, 2008 does not seem to be the start of the next Great Depression. The similarities between the two periods are far outweighed by the differences. The same appears to be true about 2008 as compared to 1980-1982 and 1973-1975. If you combined the fear and uncertainty of the Depression with the unemployment and equity market situation of ‘73-’75 and the banking crises of the early 1980s, you might come closer to describing the current recession, rather than to compare it outright to any of the other 3 periods. But even that is a stretch. The recession of 2007-2008 is unique; but though no one can predict when, just like all others before—it will end.