How bad is the recession, really?

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 disappears into negative territory, the effects can be tough. The Fed 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 2.5-3.3% from the previous forecast for growth of 2.3-3.2%.

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 some folks are saying 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.

In terms of GDP performance, unemployment and length of the downturn, we are in a severe, prolonged recession much like that of 1981-82 (although that one came right after a milder 1980 recession and a decade of “stagflation” so that the impact in the early 80s may have been worse).

But this is no Great Depression revisited. 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.

I also blog at The Purple Center.