It may come as a surprise to the millions of people out of work, to the many owners of small businesses who have gone bankrupt, or to consumers who want to buy a car or a house but cannot afford today's high interest rates--but today's recession is not yet as deep as the two that preceded it.
Real output has fallen 2.1 percent in the present slump, according to figures published yesterday by the government's Bureau of Economic Analysis. This compares with a drop of 2.6 percent in the short but steep recession of 1980 and a much larger 4.8 percent fall during the five-quarter, 1974-75 recession.
Despite these numbers, many people believe this recession is worse than those earlier ones, and there is a lot of truth in that perception. Unemployment is rising toward a new post-World War II peak. Investment in housing is at its lowest level for 15 years. And economic growth between 1980 and 1982 is likely to be the slowest for any three-year period since the Great Depression of the 1930s, according to many private economists.
Moreover, although economic policy in past recessions has been clearly aimed at boosting the economy out of its slump as soon as possible, this is not the case now. The Federal Reserve's monetary policy is directed at fighting inflation rather than stimulating growth. Fiscal policy is set to swing toward expansion this summer, but the spending cuts and tax increases now under consideration could slow recovery, some experts say.
Two key features set this recession apart from others in the postwar period. One is the extraordinarily high level of interest rates. High rates brought the recession on in the first place' they have prolonged it beyond most forecasters' expectations, and they may yet stall recovery, some experts warn.
The other main characteristic of this downturn is that it was preceded by the shortest recovery in the postwar period and is likely to be followed by one of the weakest.
No one has been able to explain adequately why interest rates are now so high nor why the economy has performed so feebly since 1979. But one major reason is clear, although often ignored. After the unprecedented inflation of the late 1970s, the primary aim of economic policy, and in particular the main concern of the Federal Reserve Board, has been to slow down the rate of inflation. "There's no question that the recession has come from policy," George Perry of the Brookings Institution said yesterday.
Tight money and--until this year--fairly tight fiscal policy have been much more successful in slowing inflation than many analysts expected. But the price of such policies is sluggish growth.
It is this stagnation that is behind the dismal outlook for jobs. Today's recession may not be as severe as that of the 1970s. But it comes in the middle of what economist Walter Heller has called an "economic swamp," rather than at the end of a period of strong growth. Unemployment already has hit the 9 percent postwar peak reached in May 1975 and is set to climb higher still.
When the 1974-75 recession began, the jobless rate was just over 5 percent. Real gross national product had climbed by more than 5 1/2 percent in both 1972 and 1973.
By contrast, when output turned down last summer, unemployment was already over 7 percent because the job market had not really recovered from the 1980 recession and growth had been disappointing for several years. Real GNP slid by 0.2 percent in 1980, rose by only 2 percent last year, and this year it is widely expected to slide again.
Most economists still expect the economy to recover in the second half of this year. Heller gave several reasons this week for expecting an upturn, including the 10 percent cut in individual income taxes due in July together with the upgrading of Social Security benefits due in July, a boost in purchasing power because of lower-than-expected oil prices and generally lower inflation, the defense build-up, a turnaround in business inventories, and some easing in interest rates--which he believes is likely.
However, many analysts fear that the upturn could be slowed by continued high interest rates as monetary policy stays tight. Some of the deficit-reducing measures now being discussed--such as a cutback and postponement of this July's cost-of-living adjustments on Social Security and other benefits--also would weaken the recovery, Brookings economists warned this week.
Prolonged stagnation means there is plenty of pent-up demand that could sustain a recovery, Perry said. The question is whether it will be unleashed for long enough to break the recent pattern, and that probably depends on how strongly policy makers want to go on fighting inflation.