Recession - then and now

" ... Spend too much time with CNBC or The Wall Street Journal these mornings and you'll be dreaming about breadlines and "The Grapes of Wrath" at night. Time for some perspective.

For the most part, the U.S. economy bounces back from hard times quickly. The downturn in the early 1990s is instructive. It had a similar starting point to the rocky period we're in. Then, as now, a financial shock related to the housing market caused problems. Then it was the collapse of the savings and loan industry.

Today it's the subprime crisis. The 1990-91 recession lasted eight months, and unemployment eventually peaked at 7.8% - not a staggering number but still more than 50% higher than the current rate. Home prices in the top 10 metropolitan areas fell 8.3% during the downturn and its aftermath. Today they're off 5% from their 2006 peak. Recovery in the 1990s was slow: It took until 1996 for housing to start rising again.

The stock market moved faster. It dropped 21% but bottomed out in three months. If we did enter a recession this past December, as many economists think, a replay of 1990-91 would mean further market declines now followed by a rebound later in the year. Not a terrible scenario. Unfortunately, it's not the only possibility.

At times a confluence of events sets a trap from which the economy can't easily escape. Pessimists see that possibility in a subprime-induced credit crunch. In the 1970s, the trap was stagflation, a combination of high inflation and low growth. The U.S. was already burdened by Vietnam War-related inflation when the Arab oil embargo sprung the snare. The economy jerked to a stop, but energy costs kept the inflation rate up and made recovery painfully hard to come by.

The 1973-75 recession lasted 16 months, about double the typical one. The Dow Jones industrial average fell 40% from its pre-recession high, or more than triple the decline we've seen since October's top. Unemployment peaked after the recession ended, at 9.1%.

Before you reach for the medicine cabinet, take comfort in some important then-vs.-now differences. The Fed, and the feds, today act earlier in a downturn. The Federal Reserve has cut interest rates 2.25 percentage points since August. And Congress is putting money in consumers' pockets through tax rebates. Even more important, notes David Wyss, chief economist at Standard & Poor's, is the absence of high inflation, the real standard-of-living killer. Energy prices notwithstanding, inflation remains mild. It ran at 11% in 1974 vs. 3% last year. ... "

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