NCPA - National Center for Policy Analysis

This Recession is Different From The Last One

February 11, 2002

Viewing each new recession as a replay of the last one leads to inappropriate policies that can sow the seeds of future recessions, or at least prolong the current one.

Bill Clinton claimed during the 1992 campaign that the U.S. economy was the worst in 50 years; but the last recession, which officially began in July 1990 and ended in March 1991, was actually one of the mildest on record.

For instance, real gross domestic product only fell 1.5 percent from peak to trough. By contrast, real GDP fell 3.4 percent during the 1973-75 recession.

The 1990-91 recession seemed worse because the snapback from previous recessions had been faster. In "V" shaped recessions both the decline and the recovery are sharp. The 1990-91 recession was more "U" shaped -- a fairly gradual decline and recovery. It was prolonged by unique factors -- particularly new bank regulations relating to the savings and loan bailout, which discouraged banks from lending.

The slowness of that recovery is illustrated by the unemployment rate, which always lags the business cycle because employers wait to lay off workers and then are reluctant to hire new ones.

  • In the previous 5 recessions, the unemployment rate had peaked 3 months after the recession's trough on average.
  • However, the unemployment rate did not peak until 14 months after the end of the 1990-91 recession (see figure).
  • In January 1993, the national unemployment rate was 7.1 percent -- below the recession's peak of 7.8 percent, but still high by historical standards.

This time, I expect a more traditional "V" shaped recovery, with unemployment falling relatively rapidly. Indeed, the unemployment rate has already started to come down, falling from 5.8 percent in December to 5.6 percent in January.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 11, 2002.


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