Some Perspective on Historical U.S. Economic Downturns and Financial Market Panics
Repoprting/Market Focus from the October 2007 Edition of the SGS Newsletter.
The table that follows is an updated version of one I published 15 years ago, covering the history of economic downturns in the United States. It also covers most of the notable financial panics, which also were associated with business contractions. The notable exception is the 1987 stock market crash, discussed later.
Prior to the Great Depression, economic contractions generally were called depressions. Recession, which is the down-phase of a depression, is the euphemism for an economic downturn, which came into use post-World War II.
The main body of the table represents about as close to an official or consensus picture that I can put together. The second portion of the table gives a slightly different SGS Version.
United States of America - Economic Contractions, 1784 to Date President Peak-to-Trough Months Change Nature BackgroundWhen It Began Of Cycle In GNP Pre- 1784 to 1789 48 Severe Str/Liq Post-Revolution. NoConstitution central authority, lack of sound money, excessive trade deficit. Jefferson 1807 to 1810 24 -20% Exg European war blocked shipments of goods to the United States. Madison 1815 to 1821 60 -15% Str/Liq Post-War of 1812. Debt excesses led to currency inflation, then debt/liquidity collapse and severe deflation. Van Buren 1837 to 1843 60 -25% Liq/Str Excess debt and currency inflation fueled by speculative lending out of England. U.S. crop failure and English banking crisis led to debt and liquidity collapse. Polk 1847 to 1848 12 -4% Exg Post-Mexican War. Effect of severe European depression was offset partially by raised expectations from discovery of gold in California. Buchanan-I Jun 1857 18 -12% Liq Banking crisis and to Dec 1858 liquidity collapse. Buchanan-II Oct 1860 8 -10% Str Tied to secession to June 1861 movement. Lincoln/ Apr 1865 32 -13% Str/Liq Post-Civil War. Retire-A Johnson to Dec 1867 ment of greenbacks and English Panic. Grant-I June 1869 18 -5% Str/Liq Secondary downturn to Dec 1870 following Civil War. "Black Friday" panic from Gould & Fiske’s efforts to corner the gold market. Grant-II Oct 1873 65 -15% Liq/Str Over-building of rail- to Mar 1879 roads. Over-extension of debt. Foreign funding collapse with Vienna Panic of 1873. Collapse of savings banks. Fear of currency debasement. Arthur Mar 1882 38 -12% Liq French Panic of 1882. to May 1885 Collapse of commodity prices. Silver and stock panics of 1884. Cleveland-I Mar 1887 13 -4% Liq Government paid off to Apr 1888 debt, forcing reduction of circulating banknotes. B Harrison Jul 1890 10 -3% Liq Baring Panic in England to May 1891 forced liquidation of foreign holdings of U.S. stocks. Cleveland-II Jan 1893 17 -16% Liq Failure of Reading to Jun 1894 Railroad triggered panic. Cleveland-III Dec 1895 18 -15% Liq/Inv Lack of confidence in to Jun 1897 currency system. McKinley Jun 1899 18 -4% Liq German stock market panic to Dec 1900 of 1899. T Roosevelt-I Sep 1902 23 -10% Liq/Inv Temporary layoffs. "Rich to Aug 1904 Man’s Panic" of 1903/04. T Roosevelt-II May 1907 13 -15% Liq/Exg 1906 San Francisco earth- to Jun 1908 quake. March 1907 panic and banking crisis. Taft Jan 1910 24 -5% Exg Increasing government to Jan 1912 regulation of railroads and trusts. Wilson-I Jan 1913 23 -13% Exg/Liq Collapse of foreign to Dec 1914 markets, loss of foreign liquidity as World War I broke out. Stock market closed. Wilson-II Aug 1918 7 -5% Str Post-World War I. Over- to Mar 1919 production of war goods, not enough jobs. Wilson-III Jan 1920 18 -9% Inv/Liq Commodity inflation/ to Jul 1921 deflation, sugar scandal. Harding May 1923 14 -4% Inv Inventory lay-offs. to Jul 1924 Coolidge Oct 1926 13 -2% Inv/Liq Real estate bust. Bank to Nov 1927 failures. Automobile over-production Hoover Aug 1929 43 -33% Str/Liq The Great Depression. to Mar 1933 Collapse of debt excesses from 1920s and liquidity crisis. Stock crash. Banking collapse. Industrial restructuring as long-term aftershock of Panama Canal construction and World War I. Permanent job loss. Overbuilding. Extreme income variance. F Roosevelt-I May 1937 13 -18% Str Second-dip of Great to Jun 1938 Depression. F Roosevelt-II Feb 1945 8 -21% Str Post-World War II. Start to Oct 1945 of conversion to peace- time economy. Truman Nov 1948 11 -2% Inv Residual post-war to Oct 1949 reconversion, recoil from excess post-war production. Eisenhower-I Jul 1953 10 -3% Inv Post-Korean War. to May 1954 Eisenhower-II Aug 1957 8 -3% Str Delayed post-war downturn to Apr 1958 ended with Sputnik. Eisenhower-III Apr 1960 10 -1% Inv/Exg 105-day steel strike. to Feb 1961 Nixon-I Dec 1969 11 -1% Inv Cyclical blow-off of to Nov 1970 "Guns and Butter" era. Nixon-II Nov 1973 16 -5% Str/Exg Post-Vietnam War. Oil to Mar 1975 Liq embargo. Aftermath of wage and price controls and U.S. dollar flotation. Carter Jan 1980 6 -3% Liq Disruption from credit to Jul 1980 card controls. Reagan Jul 1981 16 -3% Inv Inflationary environment to Nov 1982 that led to high interest rates. Bush Sr Jul 1990 8 -2% Inv/Exg Started with Iraq invading to Mar 1991 Kuwait and ended with Gulf War I, as consumer pulled back and then returned. (See SGS Version: Bush Sr.) Bush Jr Mar 2001 8 less Liq Driven by collapse in to Nov 2001 than stock-market bubble. 1% (See SGS Version: con- Clinton-II.) trac- tion SGS VERSIONSince 1981 Reagan-I Jul 1981 16 -3% Inv Inflationary environment to Nov 1982 that led to high interest rates. Reagan-II 4th-Q 1986 11 -1% Str/Liq (See text.) to 3rd-Q 1987 Bush Sr 4th-Q 1989 42 -4% Str/Liq (See text.) to 2nd-Q 1993 Clinton-I 1995 9 -1% Str (See text.) Clinton-II 3rd-Qtr 2000 36 -4% Liq/Str (See text.) to 3rd-Qtr 2003 Bush Jr 3rd-Qtr 2006 12+ -4%+ Str/Liq (See text.) to (ongoing) ________________________ Notes: All estimates of timing and depth are approximate. GNP is used throughout for consistency; GDP is GNP net of international transactions in factor income (interest and dividends). Nature of contraction: Structural (Str), Liquidity (Liq), Inventory (Inv), Exogenous (Exg). Various sources have been combined: Peak-to-Trough: Before 1857 - Business Cycles and Forecasting, Elmer C. Bratt (Bratt), 1940. 1857 and after - National Bureau of EconomicResearch (NBER) as published on their Web site (http://www.nber.org/cycles.html/). Months: Before 1857 - Bratt, 1857 and after - NBER. Depth, Nature and Background: Percentage change shown is the approximate peak-to-tough decline in economic activity as measured in constant-dollar GNP. 1784 to 1937 - Bratt, 1790 to 1987 - Ameritrust, Cleveland, Ohio (estimated as a percent variation from a projected economic trend line), 1867 to 1960 - A monetary History of the United States, 1867-1960, Milton Friedman and Anna Jacobson Schwartz, 1963, 1900 to 1995 - Albert Sindlinger, Sindlinger & Co., Wallingford, Pennsylvania, 1920 to 1993 - Center for International Business Cycle Research, Columbia Business School, 1929 to date - Bureau of Economic Analysis (BEA), full period and SGS Version - www.shadowstats.com.
Structural Changes and Liquidity Problems Dominate Economic History. Major economic and financial market upheavals usually reflect a confluence of factors. Leading up to the Great Depression, for example, the U.S. manufacturing sector had been in contraction as result of the loss of production after World War I and after the completion of the Panama Canal. The U.S. economy already was in contraction prior to the 1929 stock crash, but it was the liquidity implosion that followed the financial panic, combined with the structural change in the economy, which enabled the scope and depth of the Great Depression.
Starting with the loss of the U.S. manufacturing base to offshore facilities in the 1970s, the U.S. economy began a long-term structural change that still is ongoing and that has provided a base for many of the economic difficulties since the 1980s. With a confluence of factors ranging from accelerating dollar weakness to a period of economic weakness, the issues came to a head with the stock-market crash and liquidity panic of 1987. Alan Greenspan was the new Fed chairman, and he decided to abandon any support of the U.S. dollar in favor of stabilizing and salvaging the domestic financial markets and financial services industry.
Gerald Corrigan of the New York Fed, the entity that usually handled the various financial markets for the Federal Reserve Board, led the initial charge. Though never officially confirmed, the New York Fed worked an arrangement with a major New York investment house to buy stock futures on the second day of the stock crash, with the effect of rallying the market and bringing it back to life. Out of this action evolved the present day Plunge Protection Team, which still is active in managing unstable or disorderly financial market conditions.
The Fed did everything it could to forestall a further day of reckoning that loomed because of ever increasing trade and fiscal imbalances, along with an increasing dependence on foreign capital for the liquidity of the U.S. markets. Due to Greenspan papering over these issues, the same problems now are at uncontainable levels that threaten basic stability of the U.S. financial system and eventually the very existence of the U.S. dollar as the world’s reserve currency.
As the structural economic changes intensified, the average U.S. consumer found it increasingly difficult to make ends meet. An additional family member might end up working, but even that failed to keep the average household ahead of inflation. The difference in consumption was made up in debt expansion, which ultimately is an unsustainable process.
Without sustained growth in real (inflation-adjusted) income, there cannot be sustained economic growth. Aware of that, Greenspan helped to fuel a stock-market bubble, which had the short-lived result of fueling wealth-effect consumption. When that bubble burst and helped to trigger the 2000 recession, he tried the same gimmick with home prices. Such enabled increased home equity lending, but the bubble burst there now is exacerbating the current downturn.
The problem now is that there is little further the Fed can gimmick. A long-delayed day of reckoning is nearing, and its impact on the financial markets and economic activity will not be pretty.