How bad is the recession, really? The Federal Reserve’s latest forecast

How bad is the recession, really? The Federal Reserve’s latest forecast



On February 1st, I noted in this post that, based on the data in hand and reliable projections, the recession seemed to be on track to become the worst downturn since the back-to-back recessions of 1980-82, but that it was a huge exaggeration — and unecessarily alarmist — to say that it’s the worst since the Great Depression.  It’s about  time to take another look.


On the same day President Obama signed the stimulus plan into law, the Federal Reserve issued a new economic forecast for 2009 and beyond.  The new outlook revised expectations for the economy downward since the Fed’s last forecast in October.

The key expectations of the Fed’s Open Market Committee (composed of the presidents of the Fed’s district banks and the members of its Board of Governors) now look like this:

With the weaker than expected data offsetting an upward revision to the assumption of the amount of forthcoming fiscal stimulus, the Fed now expects real gross domestic product to decline 0.5 percent to 1.3 percent in 2009.

In October, the Fed had predicted real GDP for 2009 in a range between 1.1 percent growth and a 0.2 percent decline.

That may not seem to be much of a difference but as real growth approaches zero, much less slides into negative territory, the effects can be tough.  The Fed now expects that drop in GDP to translate into unemployment reaching 8.5-8.8% in 2009 and continuing to rise in through the beginning of 2010 before edging down over the remainder of that year.  In its October forecast, the Fed still expected unemployment to top out at 7.1-7.6% in 2009.

The Fed also revealed a longer-term forecast for the economy that looks quite a bit better than it did the last time, in part due to the stimulus plan:

At the same time, estimates for real GDP growth in 2010 were upwardly revised, reflecting greater monetary and fiscal stimulus as well as the effects of more moderate oil prices and long-term interest rates.

The forecast for real GDP growth in 2010 was revised up to 2.5 to 3.3 percent from the previous forecast for growth of 2.3 to 3.2 percent.

Of course, the Fed’s forecast could be overly optimistic or just flat wrong.  Assuming that it’s generally in the right ballpark, though, what do the numbers tells us about the severity of this recession?  Are we experiencing the worst economy since the Great Depression, as we still hear every day, or something else?

Let’s look at the data and make some comparisons:

  • GDP will shrink in 2009 by no more than 1.3% — maybe as little as 0.5%.   GDP increased in 2008 by 1.3% (after a rise of 2% in 2007), with the drop almost entirely attributable to a sharp plunge (3.8% on an annual basis) in the fourth quarter on the heels of the financial meltdown. 

If these predictions for GDP prove correct, it would be the worst decline in output since the 1.9% drop in the recession of 1981-82.

  • Unemployment will rise to at least 8.5% during 2009 and could go above 9% in 2010 (remember, unemployment tends to lag other economic trends so it can still be increasing when activity begins to pick up). Some analysts (but not the Fed) think it will break 10%.

This level of unemployment and the long period of growing unemployment is similar to what occurred in the 1981-82 recession when the jobless rate was high by historical standards already in mid-1981 and rose to 10.8% at the end of 1982, the highest post-war level up to that time.

  • The economy should bottom out sometime in 2009 (most other analysts believe that will occur around mid-year) and resume moderate growth during 2010.

Since the recession began in December 2007, that will make the duration of this one at least 18 months — longer than the 1981-82 recession, which lasted 16 months.

To sum up, in terms of GDP performance, unemployment and length of the downturn, we are in a severe, prolonged recession much like that of 1981-82.  

But this is not even come close to the experience of the Great Depression.  During the Depression, GDP nosedived month after month and year after year for a total decline of 27% during the harshest years, 1929-1933.  Unemployment was 15-25% for many years (and even higher in some years).  And the Depression lasted, depending on definitions, 7-8 years or even as many as 12-13 years.

We’re in a very bad spot — the worst in a generation and terrible if you’re one of the millions who has lost your job.  But we’ve been here before and recovered very nicely.

What do you think?  Post a comment.

(Visit me at The Purple Center)

  • mw

    Good info. Consistent with the chart that showed this recession tracking along the 81-82 line. A bit different story from that scary Pelosi chart though, where history began in 1990.

    Remind me… How many trillion dollars of this generation’s money did they have to spend in 1981-82 to recover from that recession? I’m only asking because I understand it is absolutely mandatory that we spend 3 or 4 trillion of the next generation’s money to ensure that things don’t get too uncomfortable for us now. I am sure they’ll understand.

  • Jim S

    Dueling charts and opinions again. In another thread I noted that the numbers mw cited used U3, not the more accurate (In terms of the effects on people.) U6. John Burke said that U3 was a good surrogate and that it tracked about the same. Well, in 1982 U6 reached 12%. In January of this year the non-seasonally adjusted U6 was 15.4% and seasonally adjusted it reached 13.9%. How much longer will it increase? If it is a trailing indicator it is likely to keep increasing for the rest of this year. Who knows how high it will go. Definitely higher than 1982, I’d say. Of course we have no idea what U7, which included discouraged workers, would be since they quit looking at it in 1994. I think this quite possibly qualifies as one of the most dishonest things the Clinton administration ever did. So if you look at this graph from you might see something more reflective of what we ought to be measuring.

    What is the SGS Alternate? According to the site it is

    The SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated “discouraged workers” defined away during the Clinton Administration added to the existing BLS estimates of level U-6 unemployment.

  • Jim S

    OK, so let’s try this.

  • kranky kritter

    What do I think? I think we just don’t know. What we have seen so far obviously places it on par with all of the painful recessions of the modern post ww2 era. Those are roughly comparable, I think, in terms of scope, length(expected for the current one), and unemployment.

    Here’s the thing, though. If you buy that equivalency, then all of these recessions can accurately be described as the worst since the great depression. Notice that no one seems to be saying that this one is as bad as the Great depression.

    Couple that equivalency with the additional exceptional factors of current circumstances: the collapse of the RE market, the collapse of the global finance system, and the subsequen unprecedented gigantic accumulation of US gov’t debt. That makes it pretty reasonable in my mind to wonder what other feet have yet to fall. Having lived through both the early 70s and early 80s recessions, I think this one is already as bad in feel though not length(yet), and threatens to be worse. Especially if the capital doesn’t start flowing again real soon.

    100% subjective of me to say the following, but I still don’t feel any sense of a firm new equilibrium that would signal a bottom. The stock market is testing its lows, jobs continue to be lost at a very high although apparently not accelerating pace, and we’ve yet to see how states will fare through a budget cycle. The economy will certainly take a substantial additional hit as various states slash budgets by 5 or 10% to come in line with decreased revenue. Seems to me that one more dislocation due to the falling of those dominoes is to be expected. That’s without even looking at the budget cut pain that is going to happen on the local level.

    I think if the job loss rate does not begin to diminish soon from the roughly 600k rate we’ve seen recently, then 10% unemployment is not at all out of the question. But I counsel folks not to take the bait when it comes to thinking that there is some underlying meaning to the 10% number. Unemployment reaching somewhere in the high 8% to mid 9% range is in my mind a foregone conclusion.

    It’s just stupid to feel consoled and hopeful if the unemployment rate is 9.8 % and then lose our minds if it reaches 10.1%. Just say no.

  • John Burke

    JimS seems to make the point that comparing this recession to past recessions by the U3 data (instead of U6 or some other measure) misses something. Perhaps, but you have to compare some consistent set of data to draw any conclusions about comparability. So which data?

    In defining business cycle recessions, the National Bureau of Economic Research relies mainly — but not exclusively — on changes in GDP and the BLS measure of non-farm payroll employment, which is based on a survey of large employers. As needed, it also takes into consideration employment as measured through the BLS household survey, as well as data on real personal income, real manufacturing and wholesale-retail trade sales, and industrial production, among others.

    Considering that what we can say about the length, depth and severity of past recessions is based mainly on NBEC’s use of GDP and payroll employment data, that’s where any comparison of the current recession to those past must begin. Ideally, we would have a single graph that depicted both GDP and payroll employment for all of the compared recessions. GDP alone can be misleading; employment alone can also be misleading.

    What I’ve tried to do in a couple of posts is simply to remind people what the actual data are and what hard comparisons seem to make the most sense, as well as what such agencies as the Federal Reserve and the International Monetary Fund are projecting about this recession.

    So far — and I emphasize “so far” — it does appear that a good part of the daily gloom and doom is not justified. When GDP is likely to decline 1% or 1.5%, it’s not a catastrophe. Indeed, as I noted in an earlier post, if GDP declined 10% (!), it would land where it was in the year 2000.

    That said, ANY decline or even very slow growth has a rough impact on a lot of people. Also there certainly are especially ominous factors in this downturn — its coupling with a severe financial panic (no other word), the bursting of a huge housing bubble, and the global reach of the crisis, among them. Given these, I support sweeping governmental actions such as a massive fiscal stimulus (albeit I’d prefer a somewhat different approach to the one that passed), the unprecedented bank bailout, and some substantial effort to get directly at the mortgage problem. And I favor a whole lot of new financial regulation. It would be foolhardy to do less and hope for the best.

    Nonetheless, the numbers are what they are until they change. One can point to this or that piece of data — like U6 — that seems to make this recession worse than that of 1981-82. But then, that might well be attributable to structural changes in the labor force over 25 years: more women of child-bearing age in the workforce who move in and out a lot; greater employer reliance on temporary employees; more people making a living as free lancers of one sort or another; an increase in illegal alien workers; etc. I’m not saying I know this to be the case. I don’t have the time to delve deeply into this subject right now, but any stats can be misleading.

    Plus, if you throw out one stat that seems to make this recession worse, there are other factors about earlier downturns that could be dragged into the discussion, too. For example, while the Fed is forecasting that unemployement will rise to 8.5% in 2009 and could go to 9%, during the period of the double-dip recessions of the early eighties unemployment averaged 8.3% for the five years, 1980-1984. At that time, the annual inflation rate was out of control, topping 13% at one point. In those days, we heard daily about the “misery index” of unemployment and inflation combined. That was also the period of the rapid de-industrialization of the “Rust Belt” and the exodus to the south, which made the perception of “depression” particularly in the upper mid-west and western New York a good deal worse than it is today.

    I have only one point in all of this: let’s all keep our heads and try not to leverage bad news to short-term political advantage — and that goes for Obama and his team.

  • mw

    “I have only one point in all of this: let’s all keep our heads and try not to leverage bad news to short-term political advantage — and that goes for Obama and his team.” – jb

    That is the point isn’t it? Because there would be no way to justify stampeding a trillion dollar, 1100 page, biggest spending bill in U.S. history through congress – without even permitting enough time for legislators to read the final version – unless you leverage bad news actively promote sufficient levels of fear and panic about the nature of this recession.

    BTW – I do want to express my appreciation to JB (and JS) for the analysis. I am learning more about economics than I ever wanted to know.

  • Jim S

    One of my “complaints” about the numbers and how they are used is my distrust of GDP as measured for the kind of economy we’re turning into (No, I don’t think the transformation is complete.), where many, if not most, factors don’t come from actual manufactured, mined or grown items. First, I’m not that confident in our ability to measure anything else in a way compatible with the “hard” economic factors. Secondly, I don’t think that it has that much of a relationship to what’s good for main street any more.

  • John Burke

    Jim S — Well, then, if not GDP, what about GDI — Gross Domestic Income? The NBER does consider this measure also but generally it tracks GDP closely so they rely on GDP anyway.

    There will always be some issue with any and every type of data — and that’s one reason not to look only at one (e.g., employment or unemployment) to gauge the severity of a downturn and compare it to others.

  • Jim S

    According to the Economic Policy Institute:

    1. Gross Domestic Income (GDI) is analytically equivalent to gross domestic product: both measure the level of economic activity in the US economy. GDP measures the product side of the economy (the value of final sales) while GDI measures in the income side (labor compensation, profits, rent, and proprietors’ incomes). In theory GDP always exactly equals GDI, but, due to measurement error there are slight differences between the two. When assessing profits’ share, GDI is the more appropriate metric because they are measured directly through the GDI accounts.

    So I’m not sure about whether or not it makes a difference unless you can break out the numbers on how much stays with the upper 1% of the population. Notice that one of my complaints is how meaningless the numbers are for main street.