"The worst economic crisis since the Great Depression"

That's how Barack Obama assessed the economy during his infomercial last night. Do the latest economic numbers back his alarmist, quasi-Bushian claim? Not quite:

The U.S. economy shrank at a 0.3 percent annual rate in the third quarter, its sharpest contraction in seven years [...]

The third-quarter contraction was a striking turnaround from the second quarter's relatively brisk 2.8 percent rate of growth.

Seven years, 70 years, whatever. Ah, but there are worse signs than mere GDP:

Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter - the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods - items like food and paper products - dropped at the sharpest rate since late 1950.

Getting warmer!!

The GDP report showed that disposable personal income dropped at an 8.7 percent rate in the third quarter - the steepest since quarterly records on this component were started in 1947 -- after rising 11.9 percent in the second quarter when most of economic stimulus payments still were flowing.

Finally, a number that could be the worst on record since the Great Dustbowlia, though it's a number of direction, not position, and (just like GDP) when combined with the prior quarter it shows net growth.

I don't mean to minimize the pain here. But as Nick Gillespie pointed out a couple weeks back, "Any comparison with the Depression, which featured an unemployment rate of 25 percent and a contraction in GDP of over 33 percent at its worst moments, strains credulity."

Both the outgoing administration and the incoming one (whichever wins) have been using such inaccurate, scaremongering analogies to justify massive, ill-conceived federal interventions all over the private economy that will likely have profoundly negative long-term consquences in the forms of renewed inflation, managerial inefficiency from central planners, offshoring of capital markets, and what I fear will be the biggest Bubble of them all: Having the federal government guarantee damned near every large financial risk anybody takes. In a world of ever-increasing guarantees, why shouldn't every investor pour maximum money into whatever federally backstopped financial institution is offering the highest rates? And how do you suppose said institution will be able to afford paying out those high winnings? It won't be through sound investments, boyo.

As a confirmed apocalyptic, I continue to expect the sky to fall; but as a stat dweeb I'm just not seeing the elephant tracks. Right now, during our Worst Economic Crisis Since the Great Depression, unemployment is at 6.1 percent, inflation is at 4.9 percent, and GDP shrank 0.3 percent this quarter, though it's still up for the year. I don't see how that even begins to compete with the late-Carter, early-Reagan era, when GDP shrank in both 1980 and 1982, unemployment never dipped below 8 percent from November 1981 to January 1984, and inflation never dipped below 8 percent between September 1978 and January 1982.

One big difference between that Next Great Depression and this one: Washington, in the form of Reagan and Paul Volcker, was forcing us to swallow our medicine to whip inflation and create conditions for future growth. Nowadays the only government medicine being doled out is temporary pain relief

Comments

Elemenope | October 30, 2008, 2:26pm | #

Wasn't Volcker appointed by Carter? Why does Reagan always get the credit for that pick?

Seward | October 30, 2008, 2:34pm | #

Elemenope,

Well, Reagan did reappoint him in 1983.

anon | October 30, 2008, 2:37pm | #

Matt,

Just so I understand where you're coming from, are you saying there is no crisis (because as a stat geek nothing seems out of the ordinary to you) or simply that the response to our current financial situation is out of proportion to its seriousness?

I'm open to the contrarian suggestion that there's nothing wrong at all. I'm just asking because:

a) I want to know if, in the future, you'll be seriously discounting economics advice from the large number of economists (left, right and center) who are generally on board with the notion that there is a crisis. It's not unanimous, but it's larger consensus than I might have expected.

b) I want to know what baseline you're using for definition. Is the early 80s your benchmark?

Anon

Pro Libertate | October 30, 2008, 2:39pm | #

It's arguably not the worst recession of this decade yet. If McCain is an economic idiot--and he is--what does this kind of foolish statement make Obama? And this is from a scripted infomercial!

Some indicators are bad, but the key figures that everyone points to in a recession--unemployment, interest rates, inflation--are still okay. I'm not saying that we're not in or about to enter a recession, especially given the obvious contractions in growth, but I think the severity of it is still entirely unknown. I doubt it'll be that bad, unless the government pulls another Chicken Little stunt to panic everyone.

We do have a credit crunch of some sort, but even that is hard to assess, given the b.s. flowing from Washington about the issue.

dead_elvis | October 30, 2008, 2:46pm | #

For some strange reason, a large number of people have a desperate desire to be a part of a historically noteworthy time.

"May you live in interesting times" is supposed to be a curse, not an aspiration.

Elemenope | October 30, 2008, 2:47pm | #

Well, Reagan did reappoint him in 1983.

I'm not saying Reagan shouldn't *also* get credit. My comment was more towards the elision of Carter, as if his name could not be spoken or some such.

Matt Welch | October 30, 2008, 2:49pm | #

anon -- There is a lot of daylight between "worst economic crisis since the Great Depression" and "no crisis."

We have a long, long way to go before this economic crisis is anywhere near as bad as the 1978-82 period, though the federal government (IMO) is certainly doing its worst.

Kaiser | October 30, 2008, 2:49pm | #

"a) I want to know if, in the future, you'll be seriously discounting economics advice from the large number of economists (left, right and center) who are generally on board with the notion that there is a crisis. It's not unanimous, but it's larger consensus than I might have expected."


There is a large number of people who agree than Global warming/cooling/climate change is man made too but that doesn't make it so. People are very easily swayed, and in todays world with internet access it is even worse. Masses of people can all convey their ideas and beliefs within seconds to millions of other people. Just look at "Loose Change" for instance. How many people it convinced that 9/11 was an inside job. I realize the 9/11 troofers aren't a large group (anymore) nor are they educated individuals such as Harvard economists and what not. My point still stands though. Also just because their are "a lot" of people who believe something also doesn't make it so. A majority of the planet will tell you there is a higher power in some for or another, does that mean it is true?

joe | October 30, 2008, 2:54pm | #

We're not in the third quarter. We're in the fourth quarter.

During Q3, Hit and Run was full of posts about how we were so totally not in a recession.

Anybody think the Q4 numbers aren't going to look worse than the Q3 numbers?

C'mon, this is the economic equivalent of global warming denial.

Kaiser | October 30, 2008, 2:56pm | #

Also I wanted to add, as Matt semi-pointed out above me. People blow things out of proportion very easily in todays world. I don't think anyone denies the fact that our economy is slow and in a possible recession. However that is far, far away from "the worst economic disaster since the great depression."

joe | October 30, 2008, 2:57pm | #

We have a long, long way to go before this economic crisis is anywhere near as bad as the 1978-82 period, though the federal government (IMO) is certainly doing its worst.

Looks like the answer to my question is "No."

The ass-covering has already begun. Just like in 1991: "Well, the only reason there's a recession is because you keep talking about it."

Cue Kevin Bacon at the end of Animal House.

Guy Montag | October 30, 2008, 3:00pm | #

Do the latest economic numbers back his alarmist, quasi-Bushian claim?

I have a shorter answer: No.

Elemenope | October 30, 2008, 3:02pm | #

On the subject of Volcker, apparently he is advising...OBAMA. At least, according to The Economist.

Huh.

creech | October 30, 2008, 3:02pm | #

Spinners to the left of us, spinners to the right. Want to bet the 4th quarter results, which should be worse, will be acknowledged as "troubling but far from those of the Great Depression because confidence has returned with the election of Barack Obama." And, from the right, "The economy continued to plunge as voters drew back in horror from the election of a confirmed socialist."

JW | October 30, 2008, 3:03pm | #

joe--asking and answering your own questions is not a conversation.

Matt Welch | October 30, 2008, 3:04pm | #

joe -- What the hell are you talking about? Seriously. We ran an economic forum back in the summer, where every one of our (mostly economist) participants used the R-word.

Here at Hit & Run, we've been pointing out that the president, his administration & the two presidential candidates have been fearmongering -- which they have been -- and we've otherwise been following the numbers very closely. Denying that this is the Great Depression 2.0 is really not the same as denying that 0.3 percent growth indicates a recession.

Soda | October 30, 2008, 3:04pm | #

Wait a minute, joe. The question is whether we are in "the worst economic crisis since the Great Depression." Not whether we are in an economic crisis at all.

Economic crisis? Of course. Worst since the Great Depression? Nope. Well, at least not yet.

Jerry | October 30, 2008, 3:06pm | #

For some strange reason, a large number of people have a desperate desire to be a part of a historically noteworthy time.

You see this same nostalgia when people are concerned about a possible Obama assassination, even though he is swarmed with 500 secret service agents or so. It's like they want relive the 1960s all over again.

joe | October 30, 2008, 3:11pm | #

Soda,

The question is whether we are in "the worst economic crisis since the Great Depression." Not whether we are in an economic crisis at all.

And the answer is not to be found in looking at lagging indicators, such as last quarter's GDP figure and failing to draw a trend line.

We're not in Q3. We're in Q4, and everybody not being paid to argue the opposite realizes that things are trending downward.

BDB | October 30, 2008, 3:12pm | #

I don't see any bread lines or soup kitchens yet.

I think this is arguably the worst since the 1978-1982 period. Probably slightly worse than 1990-1992, and much worse than 2001-2002.

joe | October 30, 2008, 3:14pm | #

What the hell am I talking about, Mr. Welch?

Gee, maybe I'm talking about posts like this:

Just Think How Much Stimulation We'll Need If the Economy Ever Stops Growing!
Matt Welch | August 11, 2008, 11:16am

*snip*

As for "outright recession," yes indeedy that has been averted, to the tune of 1.9% GDP growth in the second quarter.

August 11.

All is well! Everything's fine!

joe | October 30, 2008, 3:17pm | #

BDB,

First, the phrase "worst since the Great Depression" doesn't mean "as bad as the Great Depression." It means "not as bad as the Great Depression, but worse than everything after it."

Second, we are now at the beginning of the second quarter of measured GDP decline. You write "...yet." No, it's not that bad, yet. It's also getting worse.

I think it's going to be worse than '82.

Guy Montag | October 30, 2008, 3:17pm | #

Matt,

So has the great depression of FY08 arrived yet or not? I was hearing about that one for 2 years (it started out as the great depression of FY07 iirc) and we are already in FY09, without guys in top hats jumping from buildings, their brokers selling pencils on the street, people walking around wearing wooden barrels as overalls or Cords being sold off for soup bones.

Kolohe | October 30, 2008, 3:18pm | #

Right now, during our Worst Economic Crisis Since the Great Depression, unemployment is at 6.1 percent ... unemployment never dipped below 8 percent from November 1981 to January 1984
From what I have been reading, the mean prediction is that unemployment will peak at the low side of 8% (8.1-8.3) after all is said and done and a long term recovery is underway.

And with how the metrics have changed over 20 years, you can make a good argument that you need to add about a half or a full percent to today's figures to make them directly comparable to 70's and 80's data.

BDB | October 30, 2008, 3:19pm | #

I can't wait until Guy starts screaming about the "Obama recession" beginning in February.

joe | October 30, 2008, 3:20pm | #

If the economy stops growing!

He writes this in August.

So, if Welch was concluding in August that the economy was still growing as it was in Q3 when it was actually declining 0.3%, and he concludes in October that the economy right now is "only" as bad as it was in Q3, then that would mean...

BDB | October 30, 2008, 3:21pm | #

I think we're gonna go through something like Japan did in the 1990s.

The economy won't shrink very much, but it won't grow. There will be stagnation, and it will *feel* like a recession.

BDB | October 30, 2008, 3:22pm | #

And that the stagnation will last longer than a drastic recession will.

Kolohe | October 30, 2008, 3:22pm | #

Which is to say that my opinion is that this recession will ultimately measure up in aggreagate to be about equal to the early 80's one, although some individual indicators may be better or worse (or not present at all - for instance, I don't think inflation is going to be a problem this time; everything is currently pointing toward a slight deflation)

Jerry | October 30, 2008, 3:25pm | #

You won't see unemployment if you have a counteracting demographical process of people retiring from the job market.

Matt Welch | October 30, 2008, 3:26pm | #

joe -- Yes it is true, I react to economics statistics (which are, by definition, backward looking) when they are released, rather than before they are released.

Guy Montag | October 30, 2008, 3:28pm | #

Matt,

Seems you are going about this all wrong then. ;)

Kolohe | October 30, 2008, 3:29pm | #

You won't see unemployment if you have a counteracting demographical process of people retiring from the job market.

We're about 10 years too early for that. The baby boomers are still mostly in their mid to late 50's

Ravac | October 30, 2008, 3:38pm | #

joe, stop being a douche.

You asked a question a question at 2:54, and quoted a post by Matt from 2:49 as though he answered it.

joe | October 30, 2008, 3:40pm | #

joe -- Yes it is true, I react to economics statistics (which are, by definition, backward looking) when they are released, rather than before they are released.


Which is fine and quite responsible, but will by necessity be unhelpful in describing current conditions, making the previous quarter's statistics a shaky foundation from which to make proclamations about current conditions.

robc | October 30, 2008, 3:46pm | #

joe,

During Q3, Hit and Run was full of posts about how we were so totally not in a recession.

Anybody think the Q4 numbers aren't going to look worse than the Q3 numbers?

You called us in a recession before the third quarter. IF we are in a recession, it officially started July 1st. You were just as wrong before that as anyone who said we arent in a recession after July 1 was.

They at least had an understandable position, as we hadnt yet had 1 quarter of down numbers yet.

domoarrigato | October 30, 2008, 3:48pm | #

joe -

but will by necessity be unhelpful in describing current conditions, making the previous quarter's statistics a shaky foundation from which to make proclamations about current conditions.

if that is true, I wonder why we bother collecting the statistics at all... probably because they are useful in drawing conclusions about trends. your argument is a bit like "don't bother washing the dishes, they will only get dirty again"

robc | October 30, 2008, 3:50pm | #

And that the stagnation will last longer than a drastic recession will.

Got to agree. I predicted this a while back. Its why I opposed the bailout and other measures. I prefer the short deep hole.

robc | October 30, 2008, 3:53pm | #

I seriously think that if we had done nothing as a bailout plan (and I fine plan that would have been) that the next 2 years would have been ugly and that 2010-2020 would have been one of the greatest decades in US history. Now, I think it will be like Japan 1990s.

joe | October 30, 2008, 3:59pm | #

robc,

You called us in a recession before the third quarter.

Link? Quote? I don't recall making that statement before late this summer.

domo,

Try to imagine the difference between the term I used - "the last quarter's statistics" - and the term you used - "statistics" period full stop, and all will become clear.

Lagging statistics are quite useful. What you lose in timeliness you gain in accuracy and depth. You can do many useful things with lagging statistics, including draw trend lines. You're just not going to do a very good job of that if you limit your information to those lagging statistics, without using newer information and knowledge of trends and events to supplement them.

Meagan@PublicAgenda | October 30, 2008, 4:01pm | #

Times are scary, no? The U.S. economy has surely taken quite a hit over the past few months. Many people are still confused with the state of the economy — and where the candidates stand in regard to fixing it. With a recession and the need for reform on the minds of a majority of Americans, I thought many of you might be interested in two non-partisan guides we’ve put together here at Public Agenda on the economy http://publicagenda.org/citizen/electionguides/economy and taxes, spending and debt http://publicagenda.org/citizen/electionguides/taxesdebt. Feel free to check these out and get back to me with any questions. Thanks again for an informative piece!

- Meagan

domoarrigato | October 30, 2008, 4:03pm | #

Joe - all statistics that I'm aware of are lagging. When they are not lagging, we like to call them "predictions"

joe | October 30, 2008, 4:05pm | #

You're dodging, domo. You understand perfectly well what quarterly statistics are.

joe | October 30, 2008, 4:06pm | #

I've tried to discuss this in good faith with you, and you're playing little games.

R C Dean | October 30, 2008, 4:09pm | #

During Q3, Hit and Run was full of posts about how we were so totally not in a recession.

A recession is two consecutive quarters of negative growth. Its still too early to say, although I think that sometime in January we will be able to make the diagnosis.

The kvetching, joe, was over the lack of discipline in sticking to the accepted definition of a recession because it was politically convenient to do so.

domoarrigato | October 30, 2008, 4:10pm | #

not more so than you are by reinforceing the commonly held, but incorrect, belief that two consecutive quarters of neg RGDP are required/sufficient for an "official recession" or that the official proclaimation by the BLS is more than semantically meaningful.

sure monthly vs. quarterly is a tradeoff - but that's not really what you are contesting with Mr Welch, is it?

Seward | October 30, 2008, 4:16pm | #

Elemenope,

My comment was more towards the elision of Carter, as if his name could not be spoken or some such.

Well, his name was erased from the temples and other public buildings. :)

domoarrigato | October 30, 2008, 4:18pm | #

joe, I think your position is that the economy is broadly worse than the article suggests. Also, that Matt, glosses over the realities with backward looking statistics that don't capture the true situation.

I am in total and complete agreement with that assessment, and have argued that (I hope) persuasively in other threads. I do think, though, if we say the statistics don't matter because they are backward looking - we don't have much to go on.

robc | October 30, 2008, 4:24pm | #

Link? Quote? I don't recall making that statement before late this summer.

I dont have a link, but I know it came up late last year/very early this year. I offered you a Venezuela bet that you turned down related to whether we would be in an official recession by some date X that was about 4 quarters later (I dont remember if it was end of the 3rd or end of the 4th - if the latter, you should have accepted the bet). I even remember you bringing up the "some other people define recessions in ways that dont involve 2 negative GDP quarters".

SIV | October 30, 2008, 4:31pm | #

We're in a recession when the NBER says we are/were.They haven't called one yet. I want Q4 2007 for the beginning if we are starting a pool here.

SIV | October 30, 2008, 4:33pm | #

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

domoarrigato | October 30, 2008, 4:34pm | #

SIV - ill take Q308 if it's first come first serve. Unemploment rate wasn't high enough in Q407 plus Q208 was way too strong. seems pretty uncontrarian, but often the obvious is right.

Legate Damar | October 30, 2008, 4:43pm | #

joe is totally right. This is the worst economic downturn in the history of man. Only his constant trolling is preventing us from having to eat each other. Good job, joe.

SIV | October 30, 2008, 4:57pm | #

domo,

Q208 was the "free money" from the government and tax refund quarter right?.
I'm betting the NBER "adjusts" for that.

some fed | October 30, 2008, 5:03pm | #

There'll be two revisions to this number, and Q2 revisions went +1.9% (advance), +3.3%, 2.8% (final). With a measly -.3% advance number, Guy Montag could be proven right by Christmas, for all we know.

Marcvs | October 30, 2008, 6:29pm | #

If economics is the "dismal science," this thread is the fat, retarded step-child of it.

Rakune | October 30, 2008, 9:16pm | #

http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1
(click handle for link)

If you want indicators you should go to a source with a track record. The leading indicators tend to be volatile, but have pointing down for over a year.

My guess would be a bottom in 4Q 2009, just in time for our new leaders to take credit for the recovery.

Guy Montag | October 30, 2008, 10:39pm | #

joe is totally right. This is the worst economic downturn in the history of man. Only his constant trolling is preventing us from having to eat each other. Good job, joe.

I agree. Good thing I invested in ammo and am leaving the country.

joe | October 30, 2008, 11:17pm | #

“This campaign in the next couple weeks is about one thing. It’s a referendum on socialism,” Todd Akin (R-MO) 10/20/08.

So. How's that going?

Syd | October 31, 2008, 12:58am | #

I find it odd that we often don't officially know we were in a recession until it's over. Thanks a lot for the information, guys.

It's also odd to me that two consecutive quarters of -.1% percent growth is a recession, but if you have -10% growth one quarter, a +1% growth the next, and a -10% growth the third, it's not an official recession. Which would you perceive as being a recession?

Anon | October 31, 2008, 1:04am | #

Well, this thread has probably gone the way of the ghost, but a few points.

So Matt, you do believe we're in a crisis, but not as bad as the early 80s. This does provide a benchmark, since you are then admitting things are worse than the early nineties. So then, given that you express some admiration (too strong a word?) for what Paul Volcker did during that time, would you be convinced by his suggestion that the bailout is "distasteful but necessary"? And even if you don't support the bailout, would you agree with Volcker that larger deficit spending would be an appropriate response to the current crisis?

Anon

Windtell | October 31, 2008, 5:51am | #

I believe that joe actually does have a very valid point, even as his belligerent way of arguing tries to persuade me to bash him.

The August quote, and this current article, are in indeed examining the past, not the present, situation. Growth is now going lower, and faster, than it was in the third quarter. Because of this, it's also faulty reasoning for Matt Welsh to use old numbers to describe the current situation. Also note that the 3rd quarter numbers include a large chunk of time before the financial crisis started moving at full tilt. I think that the seasonally adjusted fourth quarter results are going to be especially dismal.

I also believe that if this isn't the worst recession since the great depression (careful with your logic some of you, no one is saying that the US is at 25% unemployment) than the government is doing it's hardest to make it the worst.

Bill Woolsey | October 31, 2008, 7:14am | #

The economy actually shrank during the period July, August, and September in 2008. Negative growth means it is smaller. (Real GDP isn't a growth rate, though its growth rate is reported.)

It also shrank last year, during October, November and December. (They revised the figures.)

It grew very slowly in the first quarter of 2008. It grew at a decent rate in the second quarter, but certainly not enough to catch up with the lost ground in the final quarter of 2007 and the first quarter of 2008.

The economy generally should be growing around 3%. Less than that, and things aren't going well. As a rule, much less than 3% growth and employment will fall and unemployment will rise. Actual production is less than capacity.

I think the economy has been in a mild recession for some time.

GDP is not a "lagging indicator." It is _the_ indicator, it is just that we don't know what GDP is in October yet. We find out what is happening to production in the economy only with a lag.

No one is claiming that we are _in_ a Great Depression yet. Some are claiming that we have the worst _financial crisis_ since the Great Depression. That is not the same thing as the worst recession since the Great Depression. That record is still taken by 81-82. The unemployment peaked at just less than 11% (and that is nothing much like the 25% peak in unemployment during the decade long Great Depression.)

The claims that we are in the worst financial crisis since the Great Depression haven't been well supported by the data. There is a financial crisis. It is centered on large money center banks, nonbank financial institutions, and securitized debt.

So far, traditional banking institutions (with the protection of FDIC and the help of the Federal Reserve) expanded rapidly to offset the major contraction in the troubled sectors. The rhetoric we receive is all about what is happening in the troubled sectors, "credit is frozen" and little about the banking expansion that has taken up some, most, or all of the slack. Well, more troubling, the crisis in the troubled sectors has frequently been described as as a contraction in the traditional banking sector! That, of course, is a myth. On the whole, bank credit, bank loans to business, bank deposits, and loans between banks expanded.

Whether or not this is worse than the collapse of the thrift sector during the S&L crisis is unclear.

And while it may be the worst financial crisis since the Great Depression, that doesn't make it anything like the finanical crisis during the Great Depression, where 1/3 of the banks fell and the money supply dropped by 1/3 as well. (Again, it could be that it is the worst crisis to hit Wall Street since that time.)

Reserve ratios against checkable deposits are rising to levels unseen since the Great Depression. (My calculations show a bit higher than 50%,) the Federal Reserve is increasing the quantity of reserves very rapidly (instead of slowly as in the Great Depression.) There has yet to be a currency drain from the banking system.

I am not at all persuaded that bailouts of particular finanical (or nonfinancial) firms are needed. Lowering the Federal Funds rate (as the Fed has done) seems like the appropriate response.

The Federal Reserve and the Treasury seem focused on seeing a recovery of nonbank financial institutions and securitized lending. (Returning to what we had before.) Figuring out how to expand the sound banks enough to take up the slack isn't their approach. And so, they have been using bailouts and funneling money from the Federal Reserve to a vareity of financial firms heavily involved in securitization.