This article was posted on Thursday, Oct 01, 2020

Overview:  Recessions are part of the natural cycle of economic growth. They serve to sweep away failing businesses while fostering new ones. Not all recessions are the same. Most recessions are shallow, of limited duration, and pass without affecting social norms. They are of no lasting cultural import. No additional welfare programs are added. The tax system is not materially altered. Because they have little long-term effect, most recessions are benign.

But occasionally, there are serious, almost existential, recessions. These are economic events large enough to be leveraged to move social norms. Rahm Emanuel, the former White House Chief of Staff under President Obama, said it best: “Never let a serious crisis go to waste.” Once a recession is deep enough, things become serious in the Rahm Emanuel sense. They are not to be wasted.

Consider FDR’s “New Deal” during the Great Depression. The principle behind that series of programs was, at the time, new: government has an obligation to provide full employment. That principle was quickly accepted by the citizenry and remains with us to this day.

Or consider the Housing Crash of 2007-09, during which the government determined that there really are corporations that cannot be permitted to fail. That’s a change in expectations that can take a long time to work through. The Fed is still struggling with legacy interest rate issues from the Housing Crash.

Records provide indices of how four important measurements ebbed and flowed during any particular recession. These indices are (a) duration, (b) GDP decline, (c) peak unemployment, and (d) the yield on the 10-year T-note. These elements combine in various ways to reveal how the current economic environment compares with previous recessions. A recession that does not move any of the indices is a mere bagatelle. Most recessions, even the unimportant ones, move the needles of one or two recession indices at least a little. The serious ones move two or three needles. If all four needles are spinning out of control, well, then we’re not in Kansas anymore.

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As measured by the flash unemployment rate the American economy is currently in recession. Supporting data is found in the extraordinarily low yield of the 10-year Treasury note, indicating that recovery won’t be easy. An underperforming economy historically requires materially lowering the interest rates to encourage greater consumer spending. The current base rate, as indicated by the yield on the 10-year Treasury, is measured in basis points. To place this into perspective, one basis point is equal to 1/100th of 1%. Fifty basis points is ½ of one percent. Really, that’s not very much. It’s a yield of 50 pennies on investment of $100 over a 12 month period. It does not provide much of a margin to drop rates. That particular needle is at near-record lows and continues to spin.

This article will explore what happened over the past dozen recessions in terms of the four general indices (1) duration, (2) GDP decline, (3) peak unemployment, and (4) interest rates.

Definitions:   Recession is defined as two or more consecutive quarters of decline in Gross Domestic Product (GDP). Duration is a measurement of cumulative pain: the longer the recession lasts, the more the pain compounds. Peak Unemployment measures maximum pain. GDP decline indicates the public “cost” through a reduction in living standards: the greater the decline, the greater the reduction. Interest rate suggests the cost of correction: the greater the change between beginning and ending interest rates, the more costly the correction will be. Example: recovery from a recession starting with interest rates at 10% offers more assurance of an economical recovery than if rates were at 1%. This series of articles will employ the 10-year Treasury note yield as a surrogate for interest rates in general.

A very short recession affects little more than over-ripe bananas. A long recession means locomotives wear out and are not replaced. Most recessions are somewhere between these two extremes. 

Since the end of the Great Depression (coinciding with the deficit spending of WWII) there have been 12 recessions, depending on who’s counting (some economists see two brief recessions in the space where others recognize only one).  Looking at a dozen or so examples is certainly not conclusive, but it may be enough to at least suggest a relationship of some kind: if this happens then, more times than not, that has historically followed. 


Great Depression 1929-38 Duration: 10 years. GDP decline: 30%. Peak Unemployment:  24.9% (disputed).  10yr T-Note Beg 3.42% / End 2.48%

The Great Depression of the 1930s peaked at a 24.9% (1933) unemployment rate. Because even a deflationary economy provided work for three-quarters of job seekers, the Great Depression might suggest an upper level of unemployment to be around 25%. But that is a soft number, affected by things both known and unknown. It is not guaranteed.

For example, the unemployment rate was still climbing when it reached 24.9%. It was just coincidental that FDRs “New Deal” became operative at that moment. Without the “New Deal”, it’s hard to say where the final unemployment rate might have been.

FDR funneled government money through public works programs such as the Civilian Conservation Corps, the Civil Works Administration, the Public Works Administration, and others. The development of those agencies in turn created jobs for the clerking class, those who were indisposed to manual labor, so it was kind of a win-win thing: working lads poured concrete; the clerks counted how much concrete the lads poured. The hope was that the New Deal, basically defined as “government is the employer of last resort”, would significantly reduce forward unemployment. And it did, but not enough. Unemployment during the years between the New Deal and the beginning of WWII averaged just under 15%. That is pretty strong evidence that FDR’s massive jobs program was a step in the right direction (after all, unemployment fell from 25%) but in the end was inadequate (settled at a still unacceptable 15%). 

Then on the morning of December 7, 1941, America woke up to find itself at war with Japan. In 1939, before Pearl Harbor, the armed forces (Army, Air Force (nee Army Air Corps), Navy, Marines, and Coast Guard) consisted of 174,000 men. By 1945 that number had exploded to 12,000,000, a 69-fold increase. Each of these (mostly) men and (some) women needed to be fed, clothed, trained, transported, and supplied. That meant that domestic manufacturers had to provide more than 69 times the food, uniforms, equipment, gasoline, dental floss, rifles, tanks, ships, airplanes, et alli than were required when having 174,000 men under arms was seen as perfectly adequate for any possible threat and perhaps even a mite excessive. Fielding these men had an astonishing effect on the unemployment rate: in 1940 the rate was 14.9%, in 1941 it was 9.9%, and it continued dropping until it reached 1.2% in 1944. Imagine that, from 15% to a touch over 1% in five years!

The New Deal was a start, but it proved not enough: it took the massive WWII level spending to regenerate the economy. 

Takeaways: The Great Depression was halted with the massive government infusion of cash, in this case the deficit spending of WWII. The government assumed the burden of providing full employment, an entirely new practice. Interest rates reduced by 94 basis points over 10 years.


Recession of 1945: Duration: 9 mos. GDP decline: 10.9%. Peak Unemployment: 5.2%.  10yr T-Note Beg 2.36% / End 2.23%.

Rapid demobilization following WWII reduced America’s armed forces to 1,566,000, an 87% reduction but still about 9 times the pre-war 1939 level). The end of the war meant that 10.5 million unemployed former servicemen and women were trying to find a job, an apartment, a car and a Significant Other all at the same time. The boys quickly learned that having the first three increased the odds of getting the fourth. 

Wartime rationing was lifted as the troops returned home and demobilization progressed. All during the war years there was nothing to buy: everything went to the war effort.  But things still wore out. There was ever more suppressed demand as the war years rolled past. Then, suddenly, there was no more rationing. Sales of everything skyrocketed. Within a year the wartime industries were back in civilian territory, making bobby pins, nylon stockings, Chevrolets and Jack Daniels. There was a transition period accounting for the significant GDP decline, but the ramp-up to civilian production was so fast that demobilized servicemen quickly got jobs, as reflected in the 1945 unemployment rate peaking at 1.9%. That was not far off the 1.2% rate of 1944. It was an astonishing achievement.

Takeaway:  The velocity of money increased as needful things unavailable during the war years became suddenly accessible. People had held themselves in check for four years. Now they could hardly wait to buy new tires or a pretty dress. Money moving quickly from one hand to another (taxed each step along the way, of course) enlarged the money supply (in a functional sense) and put an end to the Recession of 1945 within 9 months. Interest rates dropped a token 13 basis points, indicating balanced supply and demand. 

More to follow next month …


This article is for informational purposes only and is not intended as professional advice. Nothing in this article is presented as investment guidance. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker specializing in difficult-to-place mortgages for any kind of property. If you are thinking of refinancing or purchasing real estate Klarise Yahya can help. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected].