Steep recessions and subsequent recoveries

Much has been made about the current recession and there are lingering worries that the banking crisis and debacle in housing will prevent anything other than a sluggish recovery.

Tight credit conditions and the desire by banks to forgo all but the safest loans have many analysts concerned, including myself. And yesterday’s disappointing Gross Domestic Product report (see: GDP tumbles in 1Q) only served to remind us of the difficulties that must be overcome.

But we have seen the resilient American economy shake off tough times before and bounce back vibrantly as the chart below indicates. Despite the challenges we face, a decent rebound is a possibility.

1957-58 Recession - GDP

4Q1957	1Q1958	2Q1958	3Q1958	4Q1958	1Q1959
-4.2%	-10.4	2.4	9.6	9.5	7.9

1974-75 Recession - GDP

3Q1974	4Q1974	1Q1975	2Q1975	3Q1975	4Q1975
-3.8%	-1.6	-4.7	3.0	6.9	5.4

1981-82 Recession - GDP

4Q1981	1Q1982	2Q1982	3Q1982	4Q1982	1Q1983
-4.9%	-6.4	2.2	-1.5	0.4	5.0

Current Recession - GDP

3Q2008	4Q2008	1Q2009	2Q2009	3Q2009	4Q2009
-0.5%	-6.3	-6.1*	?	?	?

*advance Data provided by BEA Note: the current recession began in late 2007 but the full brunt was not felt until late 2008

Many of us are aware of the steep recession that occurred in the 1970s, which was followed by the Fed-led contraction of the early 1980s when interest rates soared to double-digit levels. Each of these slumps was followed by solid recoveries, though the late 1970s were plagued by high inflation.

But to find a larger two-quarter drop in GDP, one has to go back to the late 1950s. There are differences this time around, but like today, manufacturing was hard hit and global growth came under pressure. Still, the economy came roaring back.