What are the similarities and differences between the 2001 recession
and the Great Depression?
The Great Depression (1929 to 1933) is certainly considered to be an
important part of the economic history of the United States, no matter
if you experienced the troubles first-hand or heard stories of job losses
and financial struggles from family, friends, or teachers. While there
are some similarities between the 2001 recession and the Great Depression,
there are also several key differences between the two business cycles.
To begin, both economic downturns followed periods of extraordinary business
investment, productivity growth, and economic booms. Both downturns also
recorded sharp declines in business investment and stock values over a
period of several years. However, there are some critical differences
too. In the 2001 recession the economy only suffered a modest decline
in real Gross Domestic Product (total output of goods and services or
GDP), and the unemployment rate climbed to around 6 percent. This is far
below the unemployment rate peak of nearly 25 percent experienced during
1933. During the Great Depression consumer spending fell sharply, but
in the 2001 recession the consumer sector continued to increase spending
and helped offset the weakness in the manufacturing sector. The following
discussion and articles should provide additional perspective on these
two business cycles.
History Does Repeat Itself, at Least Some of the Time
Both the Great Depression and the 2001 recession followed years of exceptional
in the economy. In January 2002, Jack Beebe, then Research Director at
the Federal Reserve Bank of San Francisco offered some interesting
insights on economic conditions around the 2001 recession and the Great
Depression. He noted a key similarity, in that the 1920s marked "the
end of a very long period of productivity enhancement because of the invention
of the electric motor, which was followed by the mass production of automobiles
and other goods." Similarly, the 1980s and 1990s were years of significant
productivity growth and information technology development.
Both the 2001 recession and the Great Depression were business investment
recessions that followed periods of excessive investment. In 2000, real
fixed business investment began to decline following a surge of extensive
spending on high-tech products prior to the start of 2000 (Y2K). However,
this downturn in industrial activity was modest compared to that experienced
during the Great Depression, when industrial production fell by more than
The financial sectors also played prominent roles in both periods. The
economy and the stock markets reacted to both the increase and the decrease
in economic activity during the late 1920s and the 1990s. However, Beebe
does not believe that the economy is destined for sustained economic hardship
like that experienced during the Great Depression because of the current
stock market downturn. In fact, he noted that, "The 1929 stock market
crash should not, in and of itself, have created the Depression of the
It is important to remember that the dramatic losses in the overall stock
market over the 2000 to 2002 period pale in comparison to the close to
80 percent decline in the Dow Jones Industrial Average between 1929 and
1932. Moreover, in the Great Depression the financial crisis extended
well beyond the stock market. In the years following the onset of the
Great Depression thousands of banks failed; there have been few bank failures
associated with the 2001 recession. Not only do the magnitudes of the
forces differ between these two downturns, but a number of other factors
also may account for the differences in the economy's performance over
the two periods.
It's No Secret
Today's Economy Is Much Different than in 1929!
Beebe also noted that there are differences in the booms too. "The
boom of the 1920s was much stronger than that of the 1990s. And the asset
price bubble included land prices." He noted that there are several
other fundamental differences between the current economy and what existed
in 1929. Perhaps the most important factor is that policymakers today
have the Great Depression from which to learn. Beebe stated that policymakers
at the Federal Reserve have a better understanding of what went wrong
during the Great Depression and can draw from that knowledge to make policy
Furthermore, the economy is now more able to adapt to change as a result
of policies enacted after the Great Depression. The Federal Deposit Insurance
Corporation (FDIC) provides deposit insurance that did not exist at the
beginning of the Great Depression. This helps prevent bank runs by depositors,
a feature of the Great Depression. Unemployment insurance now exists to
provide some cushion to individuals who lose their job. Beebe also pointed
out that the Federal Reserve's monetary policy is more flexible given
that there is no longer an international gold standard or fixed exchange
Consumer Spending Kept the Economy Afloat during 2001 while Business
Consumer spending remained strong during 2001-a pattern unlike most
post-World War II recessions-when consumer spending typically declined.
During this period, the unemployment rate remained relatively low and
personal income continued to increase, adding to consumers' purchasing
power. Beebe noted the importance of an expansionary monetary policy that
has lowered short-term borrowing costs. Low interest rates and special
incentives such as those for automobile purchases contributed to strong
retail sales, especially for new vehicles. Low mortgage rates boosted
home sales and home price appreciation allowed consumers to refinance
existing mortgages and use their increased equity to fund other types
of spending. Chart 1 illustrates that the strong consumer spending
is quite unique to the 2001 recessionary period; during the last 30 years,
every recession except for the 2001 recession was accompanied by declining
consumer spending. During the Great Depression, as GDP fell and job losses
soared, consumer spending collapsed.
In summary, Beebe noted that the economy is not in "crisis"
as it was during the Great Depression, despite the fact that the word
does get used in the media and business.
- Economists at the Federal Reserve
Bank of San Francisco have recently published two Economic Letters that
discuss the topic of productivity, particularly in the Twelfth District.
"Productivity in the Twelfth District" provides an overview
on the topic and is available at http://www.frbsf.org/publications/economics/letter/2002/el2002-33.html.
" Riding the IT Wave: Surging Productivity Growth in the West"
highlights industrial sectors particularly responsible for the sharp
upturn in productivity in the Twelfth District and is available at:
"Q&A on the Economy: Prospects for
2002." Econ Ed and the Fed. Federal Reserve Bank of San Francisco.
Spring 2002. Pg. 4-5. Available at: http://www.frbsf.org/publications/education/newsletter/2002spring.pdf
Slade, Suzanne. "Year-end Interview with
Jack Beebe." Available at: http://www.frbsf.org/federalreserve/perspectives/2001/beebe.html.