Paul Swartz
Analyst, International Economics
pswartz@cfr.org 4.6.2009

How does the current economic and financial downturn match up to past contractions? To answer, we looked at
how current economic indicators compare to the past. The following graphs plot current indicators (in red) to the
average of all post World War II war recessions (blue). To facilitate comparison, the data is centered around the
beginning of the recession (marked by the 0). The average line is not a projection, but rather it serves as a historical
framework to view how the cycle has played out in the past. The dotted lines represent a composite minimum and
maximum of the relevant statistic from prior cycles.

Tolstoy famously said “Happy families are all alike. Every unhappy family is unhappy in its own way.” So too are
downturns. The current recession is likely to differ from those of the past. Unlike most recessions this down cycle
stemmed from an asset market correction that impaired financial balance sheets and froze the credit system – not by
monetary tightening.

• The fall in real GDP is

now worse than typical.
• The Federal Budget has
deteriorated more
rapidly than the norm, in
part due to the first
economic stimulus and
bank bailouts.
• The planned stimulus
implies a far larger
deficit than has been
typical in past recessions.

• Global trade collapsed in

the 4th quarter of 2008.

• World trade growth

• Unemployment initially
tends to slow as the US
increased at a rate
economy contracts.
consistent with past
• Leading indicators
recessions.
suggest a sharp
• However the latest data
contraction of trade in
suggest the worst
the fourth quarter and
deterioration in the
early next year.
labor market since
• Will the policy makers
WWII.
respond by liberalizing
trade or introducing new
restrictions?
 • The fall in nonfarm
payroll suggests rapid
deterioration in the
labor market.
• Note: The composite min
and max lines in this chart
make the visual un-useful
and thus were not
included.

• A rise in oil prices is typical

before the start of a
recession, and a fall is
typical as a recession
proceeds.
• This time oil prices initially
continued to rise after the
onset of the recession.
• Conversely the recent fall
has been larger than usual.
• The recent fall has
dramatically changed the
geopolitical position of oil
exporters.

• Industrial production
typically falls by 8%
from its peak in a
recession.
• The current recession is
creating a new post war
minimum.
• The ISM survey offers a
forward looking
indicator of industrial
production.
• A number above 50 in
the ISM survey implies
manufacturing growth
whereas a number
below 50 implies
contraction.
• This forward looking
gauge of economic
activity implies a dire
2009.

• Auto sales typically fall by

20% in a recession
• This time around they
have fallen by over 40%.

• Consumer sentiment
starts falling before the
recession begins, but
turns around soon after.
• However, pessimism
seems particularly strong
this time.
• Most post-World War II
recessions were preceded by
a tightening of monetary
policy.
• This recession was not
triggered by a rise in policy
interest rates.
• Easing started sooner and
happened faster than is
typical.
• Although the Fed’s
ammunition in nominal
target rate cuts is gone, they
have continued to ease in
other ways.

• The spread of investment

grade debt – a measure of
the risk that high quality
corporate bonds will
default – typically rises
during a recession.
• The rise during the
current cycle is
unprecedented.
• This underscores the
distress in financial
markets. It also suggests
trouble in 2009 for even
healthy companies.

• The spread on BAA debt

(the lowest investment
grade rating) is an
indicator of the risk that
lower quality companies
will default.
• The recent rise in the
BAA spread is
unprecedented.
• If it is not a product of an
unprecedented
deleveraging process in
the market, this implies
record future defaults.
 • Equity markets start to fall
nearly 8 months before a
recession begins.
• In this cycle, a fall in equity
markets preceded the
recession. However, the
subsequent fall has been
larger than normal, and the
markets have not recovered
on schedule.

Appendix: The Current Recession compared to Pre War Average and the Great Depression

The economic cycle framework applied above can be used to compare the ways in which the current downturn is
similar to and different from pre-war recessions and the Great Depression. The thick red line represents the current
recession; the thin blue line, post-war average; the thick green line, Great Depression; the thin orange line, pre war
average.

Remember these are not projections but simply an attempt, given the limitations of historical data, to present the
current economic environment in historical context.

• Due to financial
system deleveraging
the economy is
enduring
uncomfortably low
inflation.
• The current recession
looks more like a pre
war recession than a
post-war recession or
the Great Depression.  
• Production in this
cycle has collapsed
relative to the post war
average, but is in line
with the pre war
average.  
• The current collapse
does not compare to
that of the Great
Depression.  

• Although the labor

markets have
deteriorated more
than any time since the
Second World War,
they are much
healthier than during
the Great Depression.  

• U.S. trade has

collapsed compared to
the typical post war
recession but the
collapse will have to
continue to compare
with the Great
Depression.  
• We live in a world
where government
intervention is much
less controversial than
prior to the Second
World War. Thus
government stimulus
occurred faster than
was the case during the
Great Depression.  
• Significant
expenditures have
been government net
financial investment
(TARP).  

• This recession is
unusual in that the
Federal Reserve did
not tighten into the
recession which can be
seen as the norm for all
comparisons.  
• The Fed has eased
sooner and faster than
is typical.  

• So far equity market

performance has lined
up with the Great
Depression.