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Paul SwartzAnalyst, International Economicspswartz@cfr.org 4.6.2009

How does the current economic and financial downturn match up to past contractions? To answer, we looked athow current economic indicators compare to the past. The following graphs plot current indicators (in red) to theaverage of all post World War II war recessions (blue). To facilitate comparison, the data is centered around thebeginning of the recession (marked by the 0). The average line is not a projection, but rather it serves as a historical

framework to view how the cycle has played out in the past. The dotted lines represent a composite minimum andmaximum of the relevant statistic from prior cycles.

Tolstoy famously said Happy families are all alike. Every unhappy family is unhappy in its own way. So too aredownturns. The current recession is likely to differ from those of the past. Unlike most recessions this down cyclestemmed from an asset market correction that impaired financial balance sheets and froze the credit system not bymonetary tightening.

The fall in real GDP isnow worse than typical.

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The Federal Budget hasdeteriorated morerapidly than the norm, inpart due to the firsteconomic stimulus andbank bailouts.

The planned stimulusimplies a far largerdeficit than has beentypical in past recessions.

Global trade collapsed inthe 4th quarter of 2008.

World trade growthtends to slow as the USeconomy contractsLeading ind

. icators

suggest a sharp

dcontraction of trade inthe fourth quarter an

early next year.Will the policy makrespond

ersby liberalizing

trade or introducing newrestrictions?

Unemployment initiallyincreased at a rateconsistent with pastrecessions.

However the latest datasuggest the worstdeterioration in thelabor market sinceWWII.

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The fall in nonfarmpayroll suggests rapiddeterioration in thelabor market.

Note: The composite min and max lines in this chartmake the visual un-useful and thus were notincluded.

A rise in oil prices is typicalbefore the start of a

recession, and a fall istypical as a recessionproceeds.

This time oil prices initiallycontinued to rise after theonset of the recession.

Conversely the recent fallhas been larger than usual.

The recent fall hasdramatically changed thegeopolitical position of oilexporters.

Industrial productiontypically falls by 8%from its peak in arecession.

The current recession iscreating a new post warminimum.

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The ISM survey offers aforward lookingindicator of industrialproduction.

A number above 50 inthe ISM survey impliesmanufacturing growthwhereas a numberbelow 50 impliescontraction.

This forward lookinggauge of economicactivity implies a dire2009.

Auto sales typically fall by20% in a recession

This time around theyhave fallen by over 40%.

Consumer sentimentstarts falling before therecession begins, butturns around soon after.

However, pessimismseems particularly strong

this time.

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Most post-World War IIrecessions were preceded bya tightening of monetarypolicy.

This recession was nottriggered by a rise in policyinterest rates.

Easing started sooner andhappened faster than istypical.

Although the Fedsammunition in nominaltarget rate cuts is gone, theyhave continued to ease inother wa s.

The spread of investmentgrade debt a measure of the risk that high qualitycorporate bonds willdefault typically risesduring a recession.

The rise during thecurrent cycle isunprecedented.

This underscores thedistress in financialmarkets. It also suggests

trouble in 2009 for evenhealthy companies.

The spread on BAA debt(the lowest investmentgrade rating) is anindicator of the risk thatlower quality companieswill default.

The recent rise in theBAA spread isunprecedented.

If it is not a product of anunprecedenteddeleveraging process inthe market, this impliesrecord future defaults.

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Equity markets start to fallnearly 8 months before arecession begins.

In this cycle, a fall in equitymarkets preceded therecession. However, thesubsequent fall has beenlarger than normal, and themarkets have not recoveredon schedule.

Appendix: The Current Recession compared to Pre War Average and the Great Depression

The economic cycle framework applied above can be used to compare the ways in which the current downturn issimilar to and different from pre-war recessions and the Great Depression. The thick red line represents the currentrecession; the thin blue line, post-war average; the thick green line, Great Depression; the thin orange line, pre waraverage.

Remember these are not projections but simply an attempt, given the limitations of historical data, to present thecurrent economic environment in historical context.

Due to financialsystem deleveragingthe economy isenduringuncomfortably lowinflation.

The current recessionlooks more like a prewar recession than apost-war recession orthe Great Depression.

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We live in a worldwhere governmentintervention is muchless controversial thanprior to the SecondWorld War. Thusgovernment stimulus

occurred faster thanwas the case during theGreat Depression.

Significantexpenditures havebeen government netfinancial investment(TARP).

This recession isunusual in that theFederal Reserve didnot tighten into therecession which can beseen as the norm for allcomparisons.

The Fed has easedsooner and faster thanis typical.

So far equity marketperformance has linedup with the GreatDepression.