What are the similarities and differences between the 2001 recession and the Great Depression?

December 2002

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 productivity growth 1 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 half.

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 1930s."

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 decisions today.

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 rates.

Consumer Spending Kept the Economy Afloat during 2001 while Business Investment Declined
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.

Chart 1

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.