How Does the Pandemic Recession Stack Up against the Great Depression?

Many observers have been comparing the COVID-19-induced recession with the Great Depression. An Economic Synopses essay published in August examined some key economic indicators during these contractions to consider their severity and duration.

Group Vice President and Deputy Director of Research David Wheelock explained that the Great Depression was likely the largest and longest slump in economic activity in U.S. history, though records for the18th and 19th centuries are sketchy.

“Comparing the 2020 recession with the Great Depression is also fraught with measurement difficulties, but some rough comparisons based on various measures of economic activity are possible,” he wrote.

The Performance of GDP/GNP

The author began by looking at gross domestic product (GDP), a broad measure of economic activity. He noted the severity of the recent economic downturn: Real GDP fell at annual rates of 5% in the first quarter of 2020 and over 30% in the second quarter.

Prior to the U.S. officially starting to measure GDP in 1947, the country had been using another broad measure of economic activity: gross national product (GNP).GNP is a measure of the total finished goods and services produced by U.S. producers, regardless of where production takes place, whereas GDP captures total production within the U.S. and its territories, regardless of the nationality of the producers.

To compare economic activity, Wheelock plotted an index of real GDP during the current recession along with forecasts for the remainder of the year and for 2021. He also plotted an index of real GNP for the Great Depression. The index value of 100 represents the business cycle peaks on a quarterly basis for these two periods: the fourth quarter of 2019 and the third quarter of 1929. The figure below is based on data that were available when the essay was published in August.

Looking at these broad measures of economic activity, Wheelock observed that the cumulative decline in the first two quarters of the 2020 recession was somewhat larger than the decline during the first two quarters of the Great Depression. He also pointed out that the drop in economic activity during the second quarter of 2020 was larger than any quarterly decline during the Great Depression.

In the case of the Great Depression, the economy continued to contract for more than three years, the author added.

“By contrast, consensus forecasts predict that the U.S. economy will expand in the second half of 2020 and into 2021 but that output will remain below the 2019 peak for at least several quarters,” he wrote.

Other Economic Indicators

Wheelock also looked at other key indicators:

• Industrial production
• The unemployment rate
• The consumer price index
• The S&P 500 stock price index

Industrial Production

During 2020, the February-to-April decline in industrial production was the biggest two-month decline in the history of the index, which started in 1919, Wheelock pointed out. The cumulative declines in the index were similar during the first fourth months of the Depression and the 2020 recession.

However, he noted that forecasters expect the index to rise in coming months. This is unlike what happened during the Depression, when the index continued to decline for several more quarters.

Unemployment

During the 2020 recession, the unemployment rate rose from 3.5% in February to nearly 15% in April before declining in the subsequent months, Wheelock pointed out. (The unemployment rate was 7.9% in September.)

During the Great Depression, the rate did not experience such a sharp rise in its early months, but it gradually rose to 25% in 1933 and stayed above 10% throughout the 1930s, the author observed.

Consumer Prices

Consumer prices also fell during the two periods, though the Great Depression saw prolonged deflation. When the economy bottomed out in March 1933, the consumer price index (CPI) was 27% below its August 1929 reading, Wheelock wrote. Though CPI fell in the first two months of the 2020 recession, it has returned to its pre-recession level, and forecasters expect consumer prices to gradually rise.

S&P 500 Stock Price Index

After peaking in October 1929, stock prices fell about 30% during the first three months of the Great Depression, Wheelock noted. By 1932, stock prices were down almost 85% from their August 1929 level.

In comparison, stock prices fell around 20% from February to March 2020. However, he pointed out that by June 2020, stock prices had rebounded to 94% of the February level.

Similarities in Severity but Not in Duration

Wheelock noted that the 2020 recession saw sharp declines in economic activity, employment and stock prices that rivaled or exceeded the initial declines of the Great Depression. However, he pointed out that the Depression persisted, with the economy bottoming out nearly four years later. At the Depression’s trough, economic activity, employment and consumer and equity prices were far below their initial levels.

“The 2020 contraction might turn out to be the sharpest, but also the shortest, in modern times and perhaps of all time in the United States,” he wrote.

Recent debate has focused on whether the increase in economic activity since May will be maintained or turn out to be an uptick before a second dip, Wheelock observed.

“The virus and the public’s response to it will likely make that determination,” he concluded.

Notes and References

¹ GNP is a measure of the total finished goods and services produced by U.S. producers, regardless of where production takes place, whereas GDP captures total production within the U.S. and its territories, regardless of the nationality of the producers.

Additional Resources

• Economic Synopses: Comparing the COVID-19 Recession with the Great Depression
• Economic Synopses: What Can We Learn from the Spanish Flu Pandemic of 1918-19 for COVID-19?
• On the Economy: Financial Contagion: Lessons from the Great Depression