The Current Economic Recession: How Long, How Deep, and How Different From the Past?

Publication Date: January 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

In March 2001, the 10th recession of the post-World War II period began. Of these 10 recessions, only two have been long and deep the recession of 1973-1975 and the recession of 1981-1982. This report examines the current recession and recessions of the previous three decades in detail. It gives a brief overview of the other post-war recessions. It outlines the fiscal and monetary policy response to each recession. It also looks at theories of why recessions occur.

The report concludes by asking the question that many commentators in the news have asked recently: is this recession different from the past? It finds little evidence that this is the case. Commentators have claimed that this recession is different from the past because it is an investment-led (rather than a consumption-led) recession. While it appears true that the current recession has been investment-led, this is true of all the post-war recessions. Commentators have also claimed that this recession is unique because its run-up was not characterized by an accelerating rate of price inflation. While this characteristic is different from recessions of the 1970s, 1980s, and 1990s, it is similar to recessions of the 1950s and 1960s. Another similarity between the current recession and past recessions that has been somewhat overlooked by commentators is the role of rising oil prices. A spike in oil prices has preceded nine of the 10 post-war recessions.

If the recession became worldwide, this would be an unusual characteristic of the current recession. World economic growth was weak in both the 1973-1975 recession and the 1981-1982 recession. But there has never been a year in the postwar period where world economic growth contracted. Nevertheless, current forecasts predict that world growth will be weak, but still positive, in 2002 and only Japan will experience a contraction in output.

In response to the current recession, the Federal Reserve has sharply lowered the federal funds rate. There was some easing of monetary policy in all post-war recessions, although in some cases the easing did not begin until the recession was already underway. There has also been an easing of fiscal policy in 2001, with the passage of a tax cut and a move from a large budget surplus to a budget deficit. There was fiscal easing in the recessions of the 1970s and 1980s, but little or no fiscal easing in the recessions of the 1940s, 1950s, 1960s, and 1990-1991. This did not prevent the economy from recovering quickly in these episodes.

Contrary to the claims of some commentators, the Great Depression and recessions of the 19th century do not provide a meaningful comparison to current events. At that time, the economy was characterized by the maintenance of a gold standard and little financial regulation. The Federal Reserve was not created until 1913 and did not operate a discretionary monetary policy aimed at promoting economic stability until after World War II.

This report will be updated as events warrant.