Current Recession vs the 1980-82 Recession

By Spencer.

We are getting an interesting debate between different economic bloggers today and I thought I would put in my two cents worth.

Casey Mulligan at economix began it with an argument that the current recession is not as severe as the 1981-82 recession because that recession was really two recessions and if you combine them they were more severe than this recession.

I agree, we never really had a recovery from the 1980 recession and the second recession before the economy returned to full employment.

But that does not necessarily mean that the combined 1980-82 recession was more severe than the current recession.

To judge that one needs to look at the depth of the recession and see how much excess capacity the double 1980-82 recession created compared to the current recession. Maybe the best way to do that is to look at the GDP GAP or the gap between actual Real GDP and Potential Real GDP as this chart does. You can see how the recovery from the 1980 recession was incomplete and the economy was significantly below potential real GDP when the 1981-82 recession began. But we had something similar this cycle. The 2002 -2009 expansion was so weak that real GDP never got back to potential this cycle just as it did not in 1981. The current recession is not yet over. But if you assume that second quarter real GDP falls at a 4% annual rate it creates a GDP GAP of -8.4% as compared to -8.3% at the 1982 bottom. So even when you build into your comparison that the 1980 -82 recession was really two recession, you still come to the conclusion that the depth of this recession is about the same as the combined 1980-82 recessions. So by this standard, the current recession is just as severe as the 1980-82 recession even when you take into account that the earlier recession was a double recession.

A second way of measuring the depth of a recession is to compare how much excess industrial capacity is created and manufacturing capacity utilization does that. Again the chart shows how in both the 1981 recovery and the 2002-2008 expansions the economy failed to recover to prior peaks and entered the recessions with significant excess capacity already existing. But now manufacturing capacity utilization is at 65.7% versus 68.6% at the 1982 bottom. So again this measure shows the depth of the current recession to be greater than the combined 1980-82 recessions even though the current recession is not yet over.

Finally, we can compare the unemployment rate in the two recessions. The unemployment rate peaked at 10.8% at the end of 1982 as compared to the current rate of 8.9%. Of course the current rate is probably not the peak rate. So we will just have to wait and see how this comparison ends.

But when the depth of the current recession is evaluated in term the GDP GAP, capacity utilization and the unemployment rate it is obvious that this recession is creating as much excess capacity as the combined 1980-82 recessions did. So by these measures the argument by Casey Mulligan that the 1980-82 recession was more severe than this recession just does not stand up.