Is this economy worse than past recessions?

John W. Schoen Senior producer • Profile • E-mail

Rising food and gas prices, falling home values and more job losses are making readers pretty gloomy. So just how bad is the current economic slump compared to other downturns?

With record oil and commodity prices, declining home prices, a poor stock market, uncertainty over the upcoming election, and continuing military operations in the Middle East, the average citizen is in an extremely foul and gloomy mood. When was the last time we had such a confluence of negative forces affecting the typical U.S. consumer?
— Michael C., address withheld

There have been five official recessions in past 35 years. The most recent ones were fairly mild. So if you were born after 1965, you haven’t been through a nasty recession as an adult. Yet.

For some people, the mild 2001 recession didn’t even feel like a downturn. Initially sparked by the bursting of the Internet stock bubble, the 9/11 attacks put consumers and employers in a gloomy mood.

But the overall economy proved to be pretty resilient — helped by a flood of money in the form of interest rate cuts by the Federal Reserve.  Unemployment — the most painful impact of any recession — peaked at 6.3 percent in June 2003, long after the recession officially ended.

Although the jobless rate was up significantly from the late 1990s, that dot-com job market was one of the tightest in memory. College kids were getting five-figure signing bonuses to work for Internet companies with no earnings. When the music stopped, some of them had to go find real jobs.

The previous recession, in 1990-91, included some of the elements we have now: A war, a soft housing market with declining home prices in some areas, a gloomy consumer and a jobless rate that hit 7.8 percent before the economy began to recover. (The current rate is 5.5 percent.)

But that early 1990s event was relatively short. As measured by gross domestic product, there were two-back-to-back down quarters, and it was over. In the fall of 1990 the stock market fell 20 percent — and then began one of its best decades in history.

The 1980-82 recession was a different animal. In fact, it was officially two back-to-back recessions — both of which were the result of the Fed's inflation-killing interest rate policy that would be all but unimaginable today.

In 1979, after a growth and inflation roller coaster that lasted most of the decade, short-term rates were nearly 10 percent — five times the current level — and prices were still out of control. So the Fed decided to snuff out inflation once and for all by doubling rates to nearly 20 percent in April 1980. GDP fell at a 7.8 percent rate in one three-month period.

When the Fed cut rates back to 9 percent in July 1980, the first recession of the '80s officially ended.

But the inflation monster was still breathing, so the Fed doubled rates to 20 percent again by July 1981. Now GDP fell at an 11 percent rate.

From November 1980 to July 1982, the stock market dropped 24 percent.  By the end of 1982, unemployment hit 10.8 percent.

But this time, the medicine worked. Once the Fed let go of its stranglehold the second time, the economy perked up and inflation receded. The stock market soared, kicking off one of the longest and strongest bull markets in history.

The early 1980s downturn capped the end of what was, in many ways, the worst decade the U.S. economy faced since the Great Depression, coming after another deep downturn that officially lasted 16 months and ended in November 1973. In that event unemployment peaked at 9 percent and the stock market fell 45 percent.

But those “official” recession dates don’t account for the pain caused by a prolonged run of high inflation that destroyed wealth and spending power.

Economists still debate the causes of the 1970s-era stagflation. But there’s little disagreement about the damage it inflicted. Stock prices ended the 1970s about where they began; inflation cut the dollar’s buying power by more than half. Every time you got a raise, inflation ate it up. For nearly a decade, it seemed as though there was no cure.

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