Brown on Business

October 26 - November 1, 2020

‘Pandemic Recession’ drawing comparisons to the Great Depression; story still unfolding


By Wesley Brown


When folk began comparing the current downturn that the nation is experiencing, they often look back nearly a century ago to the most severe economic crisis in U.S. history – The Great Depression.


Lasting from 1929 to 1933, the Great Depression was the longest, deepest, and most widespread economic downturn of the 20th Century. The National Bureau of Economic Research (NBER), a private nonpartisan group that keeps a close watch over the nation’s business peaks and troughs, in a highly cited report in 1994 called the one-time global economic event of “unprecedented dimensions.”


“There has been no downturn of its magnitude or duration before, and there none since. It stands as a unique of the industrial economy,” NBER economist Peter Temin wrote more than 25 years ago.  


Since that global crisis lasted nearly four years, there has since been 12 recessions before the most recent downturn that began in early March when the World Health Organization ruled a global pandemic after scientists’ declared SARS-CoV-2 as the strain of the novel coronavirus that causes COVID-19.


According to NBER, the traditional definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months, usually at least two or more quarters. Before the current period that saw a whopping decline in U.S. real annual Gross Domestic Product of 31.4% in the second quarter, the U.S. economy had gone through its longest expansion in history that lasted 121 months going back to early 2009.


Among economists, the consensus held that the Great Recession, which nearly caused the nation’s banking sector to collapse, was the worst economic downturn among the 13 other recessions. Also, an Oct. 20 survey by Edelman Financial Engines, shows that half of U.S. adults (51%) believe the COVID-19 economy is worse than the 2008 Great Recession.


“Months into the pandemic, it’s clear that Americans are still struggling with the financial impact,” said Ric Edelman, founder of the nation’s largest independent financial planning and investment advisory firm.  “It is likely that Americans will continue to struggle for some time.”


But David Wheelock, an economist with the St. Louis Federal Reserve, recently published a research note assessing how the current Pandemic Recession compares to the Great Depression. The St. Louis Fed is one of 12 Federal Reserve districts that covers Arkansas and six other states.


Wheelock, group vice president and deputy director of research for the Eighth District of the Federal Reserve, explained that the Great Depression was likely the largest and longest slump in economic activity in U.S. history, though records for the18th and 19th centuries are sketchy.


“Comparing the 2020 recession with the Great Depression is also fraught with measurement difficulties, but some rough comparisons based on various measures of economic activity are possible,” he wrote.


Still, Wheelock began his research by looking at GDP, which measures the value of the goods and services produced by the nation’s economy less the cost of the goods and services used up in production, adjusted for price changes. GNP is a measure of the total finished goods and services produced by U.S. producers, regardless of where production takes place.


Wheelock noted the severity of the recent economic downturn, including a contraction of 5% in the first quarter and the decline of more than 30% in the second quarter. Prior to the U.S. officially starting to measure GDP in 1947, Wheeler said the U.S. had been using another broad measure of economic activity, gross national product. 


To compare economic activity, Wheelock plotted an index of real GDP during the current recession along with forecasts for the remainder of the year and for 2021. He also plotted an index of real GNP for the Great Depression. The index value of 100 represents the business cycle peaks on a quarterly basis for these two periods, including the fourth quarter of 2019 and the third quarter of 1929.  


Looking at these broad measures of economic activity, Wheelock observed that the cumulative decline in the first two quarters of the 2020 recession was somewhat larger than the decline during the first two quarters of the Great Depression. He also pointed out that the drop in economic activity during the second quarter of 2020 was larger than any quarterly decline during the Great Depression.


In the case of the Great Depression, however, the St. Louis Fed forecaster said the U.S.  economy continued to contract well over three years before the recovering in the first half of 1933.


“By contrast, consensus forecasts predict that the U.S. economy will expand in the second half of 2020 and into 2021 but that output will remain below the 2019 peak for at least several quarters,” he wrote.


Wheelock also looked at other key economic factors, including industrial production, the unemployment rate, the consumer price index and S&P stock price indicators. On industrial production, what he found was that during 2020, the February-to-April decline in industrial production was the biggest two-month decline in the history of the index, which started in 1919. 


The cumulative declines in the index were similar during the first fourth months of the Depression and the 2020 recession. However, the consensus among Fed economists is that the U.S. production will continue to rise in the coming months. This is unlike what happened during the Depression, when the index continued to decline for several more quarters. 


On unemployment, there is not much comparison. The U.S. jobless rate spiked from 3.5% in February to nearly 15% in April before declining in the subsequent months. It now sits at 7/9%, nearly double last year’s all-time low of 3.4%. During the Great Depression, the rate did not experience such a sharp rise in its early months but rose gradually to 25% in 1933 and stayed above 10% throughout the 1930s, said Wheelock.


Consumer prices also fell during the two periods, though the Great Depression saw prolonged deflation. When the economy bottomed out in March 1933, the consumer price index (CPI) was 27% below its August 1929 reading, Wheelock wrote. Though CPI fell in the first two months of the 2020 recession, it has returned to its pre-recession level, and forecasters expect consumer prices to gradually rise.


After peaking in October 1929, stock prices fell about 30% during the first three months of the Great Depression. By 1932, stock prices were down almost 85% from their August 1929 level. In comparison, stock prices fell around 20% from February to March 2020. However, the Fed forecaster pointed out that by June 2020, stock prices had rebounded to 94% of the February level.


So, what is the conclusion by the St. Louis Fed economist? Wheelock noted that the 2020 recession saw sharp declines in economic activity, employment and stock prices that rivaled or exceeded the initial declines of the Great Depression. However, he pointed out that the Depression persisted, with the economy bottoming out nearly four years later. At the Depression’s trough, economic activity, employment and consumer and equity prices were far below their initial levels.


“The 2020 contraction might turn out to be the sharpest, but also the shortest, in modern times and perhaps of all time in the United States,” he wrote.


But the 2020 story is not yet finished. Recent debate has focused on whether the increase in economic activity since May will be maintained or turn out to be an uptick before a second dip, Wheelock observed. “The virus and the public’s response to it will likely make that determination,” he concluded. 


In economist speak, that means check back in few more months or until a COVID-19 vaccine is found.  


  • Wesley Brown
    Wesley Brown