Riding the waves

The historical ups and downs of America’s economy

Created date

June 10th, 2010
Talk of recessions and bubble bursts has dominated both print columns and radio and television airwaves for nearly two years. But with the economy well into a recovery, experts can better assess the downturn and place it within the larger context of recessions throughout American history. One fact on which most economists agree is that recessions are a natural part of the economic cycle. There have been recessions as long as there have been economies, says Kevin Hassett, director of economic policy studies at the American Enterprise Institute in Washington, D.C. Some really astonishing ones have gone down over time, easily going back to the 19th century.

A long history

Actually, Americans faced financial crisis even earlier with the Panic of 1797, which occurred on the heels of a burst land speculation bubble and a nearly-crippled Bank of England. In 1819, a failure of the American banking system resulted in five years of foreclosures, job losses, and poor manufacturing output. Lucrative financial and land speculations after the Mexican-American War came to an end in 1857 with a recession that lasted 18 months. Yet another hit in October 1873, this one spanning 65 months. Others came in 1893, 1907, 1918, 1926 (soon followed by The Great Depression), 1945, and just about every decade thereafter up through the most recent slump, the end of which economists date around July 2009. Now with the benefit of at least a little hindsight, experts are beginning to look back over this long line of dips to see where The Great Recession ranks. In terms of employment, the most recent recession probably has been the worst one since the 1930s, says Barry Bosworth, a senior fellow in economic studies at the Brookings Institution in Washington, D.C. On the other hand, the recession of 1981 was more severe in its decline in Gross Domestic Product [GDP], and certainly, people should not compare it to The Great Depression, which left 25% of American workers unemployed.

Peaks and troughs

Aside from the dark consequences of financial hardship, these downturns share something else in common recovery and subsequent periods of prosperity. The timeline of American economic activity essentially forms a series of peaks and troughs largely based on a boom-bust cycle. This, in turn, creates waves of highs and lows, the distance between which depicts a recession s length. There s not really any clear reason as to why some recessions are longer or shorter than others, but the variation in length is extreme, says Hassett. The shortest one on record is a six-month recession in 1980, and the longest is that of 1873. At the end of both recessions, short and long, a rise in indictors such as GDP and consumer spending buoyed the economy and signaled a recovery like the present one. The recovery in GDP that we re seeing now is positive, says Bosworth. If you asked experts six months ago what the GDP would be, they would have probably put it at 2% or 2.5% for the next year. They re now up to 3% or 3.5% for the next year, so things have turned out to be better than they ve anticipated. According to figures published in an April report from the Bureau of Economic Analysis (BEA), GDP increased 3.2% in the first quarter of 2010 following a 5.6% increase the previous quarter. What s more, BEA data show a nationwide drop in the personal savings rate, suggesting that American consumers have begun to loosen their purse strings.

On the home front

The housing front is one area in which this is particularly evident. Ken Fears, manager of regional economics for the National Association of Realtors, says that March 2010 saw a 16% increase nationally in existing home sales compared to March 2009. With mortgage rates as low as they ve been, people have realized that this is a great time to buy, and it s becoming a much better environment in which to sell, he remarks. With more buyers in the market, competition is greater, and it s common for sellers to get their asking price and even multiple bids. Such changes point to a rising tide that will lift all boats. It has in the past, and it should in the future.

Business as usual

Since the recession s end in July 2009, economists have busied themselves with quarterly projections and commentary on the past, trying to make sense of where the 21st century s Great Recession ranks. The consensus among experts is that while it was one of the worst since the 1930s, economic downturns, in general, are as old as economies themselves. Bob Clauss knows just what they mean. Though not an economist, he spent over 40 years as owner and operator of an Illinois-based sign business, a position that left him keenly aware of economic ups and downs. Looking back, it seems as though we would fall into a recession every ten years or so, most of them lasting about six months, he says. Business would go very well for a time, drop off, and later bounce back to the point where you never knew you were in a recession. A resident at Monarch Landing, an Erickson-managed community in Naperville, Ill., Clauss cites as an example 1979, the year he bought a new building for his business, Parvin-Clauss Sign Company. Shortly after we moved into our new location, the economy went downhill [the recession of 1980], he recalls. Then by the mid 1980s, we were in the best years I had experienced in business so good, in fact, that I was able to buy two cars in one day. The company saw more years of prosperity throughout the mid and late 1990s, when Clauss retired and his son took over the business. Though Clauss does admit that his son experienced a tough go in the latest recession, he, too, has weathered the storm as his father did many times before him. These kinds of things happen in any economy, Clauss remarks. You get through it by adapting to circumstances as best you can until you reach better times.