Depression versus Recession Debate
For some odd reason I find the semantic debate about whether we are currently in a bad recession or a depression interesting, despite the fact that it really doesn't matter much in the grand scheme of things. Barry Ritholtz posted some interesting facts, not made up generalizations, today about why the current downturn is not nearly as bad as the Great Depression was. They included:
"• From its 1929 peak to the ultimate low in 1932, the Dow Jones Industrial Average fell 89% versus 43% for the 2008 collapse — literally, the Depression was 2X worse;
• In the 1920s and ’30s, Mortgages were interest only, 3 (or 5) year financings, with a balloon payment at the end. No balloon payment, or rollover of credit, you lost the house.
• Credit disappeared after the crash — and defaults skyrocketed. Foreclosures may be high today at a rate of 1 per 81 homes with a mortgage, but they are nowhere near the 1 in 4 homes with a mortgage that defaulted or could not roll over their loans;
• I haven’t come across reliable data as to how much home sales dropped and prices fell, but with a 25% foreclosure rate and credit nonexistent, it is probable that, like the stock market, it was far worse than the current housing collapse;
• Manufacturing output took production in the 1930s back to the lowest levels since 1901, almost a third of a century earlier;
• Consider the steel industry: Production dropped 75% drop from its pre-crash peak (1929), cascading from more than 63 million net tons of ingot iron in 1929 to barely 15 million tons produced in 1932.
• Bethlehem Steel, which had been at 90% capacity in ‘29, was operating at 13% of capacity by 1932. Other than securitizing mortgages, underwriting derivatives and/or credit default swaps, can you name any major company or industry that saw this sort of collapse today?
• Any measure of unemployment — U3 at ~10% or U6 ~17% — is far below the 1930’s one in four adult males unable to fund work. (See chart below)
• Producer prices (PPI index) didn’t fall single digits — it utterly collapsed in the 1930s, far worse than today.
Even the worst of the complex difﬁculties of the 2008–2009 credit crunch and housing recession were mere sun showers compared to the ﬁnancial hurricane of the Depression era: Banks have f ailed, but the FDIC’s guarantees have prevented widespread panic. Unemployment has risen, but f ar below the worst levels of the 1930s. And the two million or so foreclosures over recent years are f ar less, on a percentage basis, than the nearly 20 percent foreclosure rate in the 1930s.
In short, while the broad economy circa early 2009 is ugly, it remains far healthier than during the Great Depression — by just about every measure, and in many cases, by orders of magnitudes."
I agree with Ritholtz. Anyone who thinks that things are worse right now than they were back in the 1930s has absolutely no idea what they are talking about. And things seem to be stabilizing. Weekly jobless claims need to drop to the 400,000 level in order for the jobs market to start improving. We have fallen from a high of around 670,000 to the 550,000 that we are at today. That's a drop of nearly 18% from their peak, while the unemployment rate has risen by less than 5% during the same period.
I'm not saying that the recovery is going to be robust. It won't be. Things are still tough and they will continue to be for a long time, but we will eventually recover from this mess. the process has already begun, though it will be much slower than the "V" people believe.