HISTORY OF U.S.

RECESSIONSor “Where can a fella get a cup o’ coffee?” . . . (cheap)

http://www.123rf.com/stock-photo/foreclosure.html

What is “recession?”

A period of declining incomes and increasing unemployment. No ironclad rule for official business cycle dating . . . but a good rule of thumb is two consecutive cycles of falling Real GDP.

- Gregory Mankiw, Harvard Univ. Council on Economic Advisors 2002-05

A period when output and employment are falling.-Paul Krugman, Princeton Univ. Nobel Prize Economics 2008

I’d rather be vaguely right than precisely wrong. -John Maynard Keynes

The Business Cycle

Trough

Peak

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Contraction

A Brief History of some U.S. Recessions

*Before World War II, eight U.S. recessions worsened into depressions (1807, 1837, 1873, 1882, 1893, 1920, 1933, and 1937)

**Since World War II, there have been nine recessions (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, and 1990-92)—not one has deepened into depression.

**During the 70s, inflation and unemployment grew together, forming "stagflation.” Some had predicted it in the 60s.

**By 1980, the "misery index" reached 20 percent. Fed Chairman Paul Volcker was committed to fighting inflation before unemployment, and he kept interest rates high to wring inflationary expectations out of the economy. By the summer of 1982, the economy was threatening to free fall, but by then inflation looked defeated. Abruptly, Volcker slashed interest rates and flooded the economy with money. A few months later the economy roared to life, in a recovery that would last seven years.

**In October 1987, the stock market crashed. The 508-point drop was even worse than the Crash of '29. This time, learning from its mistakes, the Fed sharply expanded the money supply. And the recovery continued without a bump.

Start ofrecession Duration(in months)

Oct 1929 43

Nov 1937 13

Feb. 1945 9

Nov. 1948 11

July 1953 10

Aug. 1957 9

April 1960 10

Dec. 1969 11

Nov. 1973 16

Jan. 1980 6

July 1981 16

July 1990 9

Dec 2007 ??

RECENT RECESSIONS AND THEIR DURATION

democraticunderground.com

See Handout from NBER(National Bureau of Economic Research)….. The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For more information, see the latest announcement from the NBER's Business Cycle Dating Committee, dated 12/01/08. Source: Public Information Office National Bureau of Economic Research, Inc. 1050 Massachusetts Avenue Cambridge MA 02138 USA 617-868-3900

THE GREAT CRASH: What Happened?

1925: value of all stocks= $27b

1929: value of all stocks= $87b (rising $11.4b in 1928 alone)

*relatively small number of companies and people held much of the nation’s wealth

**farmers and workers were suffering

***ordinary people went into debt buying consumer goods such as refrigerators and radios on credit.

****industries were producing more goods than consumers could buy, developing large surpluses. (ie, Autos)

Additionally, investors were going into debt investing in the stock market. The incredible

climb of the stock market encouraged SPECULATION, the practice of borrowing

money to invest in high-risk investments hoping for a big return.

Small investors began using life savings to buy stocks. To encourage the less-wealthy,

stockbrokers invented the practice of BUYING ON MARGIN, which allowed people to buy

stocks for a fraction of the cost and borrow the rest from the brokerage.

*Worried investors began to sell and prices fell further.

*By Monday, October 28, 1929, stocks were selling for a fraction of what people had paid for them.

*On October 29, 1929, known as BLACK TUESDAY, a record 16.4 million shares were sold.

The GREAT CRASH had begun. . . . . .

*On September 3, 1929, the Dow reached an all time high of 381. After the prices began to fall, some brokers demanded repayment of loans.

*When the market opened on October 23, 1929, the Dow had dropped 21 points in an hour.

The Dow Jones Average was started by Charles H. Dow and Edward Jones at a time when the stock market was not highly regarded. He began testing his Average in 1884 with 11 stocks, most of them railroads, which were the first great national corporations. In the spring of 1896, he introduced the 12-stock average to the nation. Charles Dow

1852-1902

The original 12 stocks on the Dow Jones Average were:

American Cotton Oil

American Sugar

American Tobacco

Chicago Gas

Distilling & Cattle Feeding

General Electric

Laclede Gas

National Lead

North American

Tennessee Coal & Iron

US Leather preferred

US Rubber

In the autumn of 1896, he dropped the last non-railroad

stock from the original average and made the 20-stock railroad average. Today, this is called

the TRANSPORTATION AVERAGE.

In 1916, the Dow Jones industrial average was increased to 20 stocks

and on October 1, 1928, it was expanded to 30--the number of

stocks comprising the average ever since.

Currently, the 30 stocks on the Dow Jones Industrial Average are:

Exxon/Mobil

General Electric

Hewlett Packard

IBM

Intel

Johnson & Johnson

JP Morgan Chase

Kraft Foods

McDonalds Corp

Merck & Co.

Microsoft Corp

Pfizer

The Coca-Cola Corp

The Home Depot

The Proctor & Gamble

Travelers Comp

United Technologies

Verizon Communications

Wal Mart

Walt Disney

3M Co

Alcoa

American Express

American Int’l Group

AT & T

Bank of America

Boeing

Caterpillar

Chevron

Cisco

E.I. Dupont de Nemours

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The Dow Jones Industrial Average opened at 40 in the

year 1884

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By 1920, the index had reached 100

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On September 3, 1929, the index reached a high of 381.

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October 28, 1929, the Dow fell 38 points (down 12.8%) and on

October 29, 1929, it fell 30 points (down 11.7%) to close at 230. This

was a 2-day percentage loss of 24.5%

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By July 8, 1932, the Dow closed at 41.

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So…………..

How long did it take the Dow to reclaim it’s all time high of 381 ??

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The answer : 1954 (22 years)

WHY?

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What year did it reach 1000?

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The answer : 1972 (18 years)

WHY?1972

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By January of 1987, the Dow reached 2000.

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Then on October 19, 1987, the Dow went from 2240 to 1738. It

lost 507 points in its largest EVER one day percentage loss of

22.6%.

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In 1991, the Dow reached 3000.

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In 1995, it hit 4000 in February and 5000 in November.

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In 1996, the Dow reached 6000.

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In 1997, it hit 7000 in February and 8000 in July.

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In 1998, the Dow reached 9000.

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In 1999, it hit 10000 in March and 11000 in May.

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It finally reached a high of 11,722 in January 2000.

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Can you see why Alan Greenspan called the nineties a period of “irrational exuberance?”

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The following is a chart of the Dow (1900-present) as compared to the inflation adjusted Dow (1925-present).

In 1932, President Roosevelt created reform measures in

response to the crash of 1929. He formed the

SECURITIES AND SECURITIES AND EXCHANGE COMMISSIONEXCHANGE COMMISSION

to regulate the stock market.

In charge of the SEC, he placed Joseph Patrick Kennedy, the father of

President John F. Kennedy.

UNEMPLOYMENT

www.bls.gov(Picture from the Franklin D. Roosevelt Library, courtesy of the National Archives and Records Administration.)

Press Photo/Hollyn Johnson

What is the Unemployment Rate?

Unemployment: The number of people who are actively looking for work but are not currently employed.

Labor Force: The total number of people employed and unemployed.

Discouraged Workers: People who could work but have given up looking for a job (not included in the labor force)

Underemployment: People who work but receive lower wages, fewer hours or both

Unemployment Rate =# unemployed

# labor forceX 100

The Unemployment Rate and Recessions Since 1948

Krugman and Wells: Macroeconomics, First EditionCopyright © 2006 by Worth Publishers

The NBER (National Bureau of Economic Research) has identified 10 recessions since World War II. During the period 1948 to 2004, the average unemployment rate was 5.6%.

9.7% Aug 2009

Unemployment RateSource: Bureau of Labor Statistics

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AUG 2009 = 9.7%

HIGHEST STATES (July 2009)

1) Michigan 15.0 %

2) Rhode Island 12.7 %

3) Nevada 12.5 %

4) Oregon 11.9 %

California 11.9 %

5) South Carolina 11.8 %

6) Ohio 11.2 %

7) North Carolina11.0 %

Kentucky 11.0 %

8) Florida 10.7 %

Tennessee 10.7 %

9) Indiana 10.6 %

DC 10.6 %

10) Illinois 10.4 % Source: Bureau of Labor Statistics

Historic Highs

16.9 (Nov 1982)

12.7 (Jul 2009)

12.5 (Jul 2009)

11.9 (May 2009)

11.9 (Jul 2009)

11.8 (Jun 2009)

13.8 (Jan 1983)

11.0 (May 2009)

12.1 (Dec 1982)

10.7 (Jul 2009)

12.4 (Dec 1982)

12.8 (Nov 1982)

11.4 (Mar 1983)

12.9 (Feb 1983)

HIGHEST STATES (August 2009)

1) Michigan (15.0) 15.2 %

2) Rhode Island(12.7) 12.8 %

3) Nevada (12.5) 13.2 %

4) Oregon (11.9) 12.2 %

California(11.9) 12.2 %

5) South Carolina(11.8)11.5 %

6) Ohio(11.2) 10.8 %

7) North Carolina(11.0) 10.8 %

Kentucky(11.0) 11.1 %

8) Florida (10.7) 10.7 %

Tennessee(10.7) 10.8 %

9) Indiana (10.6) 9.9 %

DC (10.6) 11.1 %

10) Illinois (10.4) 10.0 % Source: Bureau of Labor Statistics

Historic Highs

16.9 (Nov 1982)

12.8 (Aug 2009)

13.2 (Aug 2009)

12.2 (Aug 2009)

12.2 (Aug 2009)

11.8 (Jun 2009)

13.8 (Jan 1983)

11.0 (May 2009)

12.1 (Dec 1982)

10.7 (Jul 2009)

12.4 (Dec 1982)

12.8 (Nov 1982)

11.4 (Mar 1983)

12.9 (Feb 1983)

Real US unemployment rate at 16 pct: Fed officialAug 26 02:25 PM US/Eastern

The real US unemployment rate is 16 percent if persons who have dropped out of the labor pool and those working less than they would like are counted, a Federal Reserve official said Wednesday. . . . . . . . . Lockhart pointed out in a speech to a chamber of commerce in Chattanooga, Tennessee that those two categories of people are not taken into account in the Labor Department's monthly report on the unemployment rate. The official July jobless rate was 9.4 percent.

Lockhart, who heads the Atlanta, Georgia, division of the Fed, is the first central bank official to acknowledge the depth of unemployment amid the worst US recession since the Great Depression.

. . . an estimated 100,000 unemployed Michigan workers are expected to lose their jobless benefits by the end of the year. (Aug 24, 2009 Channel 3 News, Kalamazoo, MI)

DETROIT (CNNMoney.com) -- On a side street in an old industrial neighborhood, a delivery man stacks a dolly of goods outside a store. Ten feet away stands another man clad in military fatigues, combat boots and what appears to be a flak jacket. He looks straight out of Baghdad. But this isn't Iraq. It's southeast Detroit, and he's there to guard the groceries. . . . .

Real GDP

http://www.fotosearch.com/photos-images/ (royalty free)

What is Real GDP?

GDP = C + G + I + Xn

adjusted for inflation

Real GDP for a given year is the given years’ nominal GDP stated in the price-level using a

base year.

Generally speaking:

C = Purchases of goods and services by individuals. The “demand” side of the economy. “C” accounts for about 70% of the GDP. (some argue this is misleading since health care is included here (government and individual) and much of what we buy is imported—Michael Mandel, BusinessWeek,14Aug2009)

I = Companies spend money on projects expected to increase future output and prices. Business investment accounts for 12% and residential investment accounts for about 4% of the GDP.

G = Spending by Federal, State and Local government accounts for about 20% of GDP.

Xn = Americans buy more goods and services from abroad that the other

countries buy from us. The net outflow is subtracted from the GDP, accounting for about minus 2 percent or so of the total GDP.

From website of Mark Perry, Economics Professor, University of Michigan, Flint Campus

Real GDP Fell by 29.3% From 1930 to 1933

From website of Mark Perry, Economics Professor, University of Michigan, Flint Campus

Average GDP 2008 = +1.3%

WSJ Projected GDP for 2009 =-.30 est.

So…….

+1.3 and -.30

or a little more severe than the 1990-91 recession (+1.9 and -.20) and a little less severe than the recessions of 1974-75 and 1981-82. According to forecasts.org/gdp.htm, as of Sep 4, 2009,

current economic indicators for 2009 were:Inflation: -1.89GDP %: -1.02

The Unemployment Rate and Aggregate Output During the Great Depression

Krugman and Wells: Macroeconomics, First EditionCopyright © 2006 by Worth Publishers

QUESTIONS FOR DISCUSSION

What happens to GDP if health care goes from

“C” to “G”?http://www.ibdeditorials.com/series27.aspx

AVERAGE INCOME

(Picture from the Franklin D. Roosevelt Library, courtesy of the National Archives and Records Administration.)

Civilian Conservation Corps. (Circa 1933)

What is the impact of Capital Gains?

(Data will become more accurate after the census in 2010.)

1913-2006

Average Teacher’s Life National MinimumDecade Salary SalaryExpectancy Debt Wage

(m/fe)1930s $1,368 58.1—61.6

1940s $1,299 $1,441 60.8—68.2 $43b .43

1950s 2,992 65.6—71.1

1960s 4,743 5,174 66.6—73.1 $286b .80

1970s 7,564 67.1--74.8 $382b 1.35

1980s 15, 757 69.9--77.6 $914b 3.10 (1980) $2,000b (1987)

1990s 13.37/hr 39,347 73.1--79.1 $5413m 5.15 (1997)

2000s

http://kclibrary.lonestar.edu/decade30.html (Kingwood College)

http://quickfacts.census.gov/qfd/states/00000.html

http://www.bea.gov/

U.S. Census Bureau Quick Facts

Bureau of Economic Analysis, Department of Commerce

Bureau of Labor Statistics, Department of Laborhttp://www.bls.gov/

St. Louis Fed: FRED 2http://research.stlouisfed.org/fred2/

Economic Indicators

http://www.economicindicators.gov/

http://alfred.stlouisfed.org/

Archived Economic Data: St. Louis Fed

Geo Fred: St. Louis Fed

http://geofred.stlouisfed.org/