The downturn this time, in light of '74-75: pickup may tarry awhile
The decline in levels of US economic activity since January 1980, though it resembles difficulties in 1974-75, is not a simple repeat of that earlier period.
Simplistic generalizations as to the current situation being more or less severe or more or less prolonged than that in 1974-75 distort what is happening.
Many of the observations being made exist only in the eyes of the beholder. That is, the relationship between the two periods depends on what measures of the economy you look at and over just what periods.
A major stumbling block in making comparisons is the designation of official dates when a decline is said to have started.
Officially, the turning-point committee of the National Bureau of Economic Research has designated January 1980 as the month after which the economy began to recede. Its corresponding date a few years back was November 1973.
Unfortunately, these official designations do not lend themselves to direct comparison.
There is no question that the economy stopped rising as of November 1973. But for at least nine months after November 1973, the economy as a whole moved indecisively.Not until after August 1974 did major pervasive weakness occur.
After January 1980, major pervasive weakness occurred immediately.
Thus, the months since January 1980 have seen widespread weakness far, far greter than that after November 1973. Thus far, then, the economy has receded at a much more severe rate than in 1973-74.
Yet, only recently, you have been told that the second-quarter 1980 decline in real GNP was the largest decline since 1974-75, not greater.
Further, most economists are suggesting that the current trouble probably is not and will not be as severe as that in 1974-75.
For any realistic comparison of today's developments with those of seven years ago, it is necessary to use dates that differ from the so-called "official" dates.
A realistic dating would compare March 1979 with November 1973 and January 1980 with August 1974.
From March 1979 to January 1980, the economy moved much as it did from November 1973 to August 1974. Both periods found the economy struggling to keep from really falling back. Activity in the earlir period may have been slightly weaker than that in the more recent period; but similarities were considerably greater than differences.
Having established a more realistic dating, we can then proceed to compare what has been happening since January 1980 with what happened after August 1974.
Quarterly GNP data, however, do not readily lend themselves to such a comparison. August 1974 was the middle month of a quarter; January 1980 was the first month of a quarter. Through fourth-quarter 1974, the first quarter of receding activity at that time, the economy had been receding for four months. Through second-quarter 1980, the first quarter of receding activity this time, the economy had been receding for five months.
Better comparisons of today's decline in economic activity with that of 1974- 75 can be made from monthly data. These show a mixed picture.
If we consider the weakness in employment and levels of unemployment and industrial production, all of which are expressed in physical terms and all of which reflect the supply side of the economy, we find that their weakness in the five months since January 1980 is not nearly as great as that in the five months after August 1974.
If the unemployment rate, for example, was worsening as rapidly as in 1974-75 , it would be 9.2 percent in June 1980 rather than the actual 7.7 percent.
If we consider the weakness in personal income, retail sales, or total business sales, all of which are expressed in inflated dollar terms and all of which reflect the demand side of the economy, we find that their weakness in the five months since January 1980 is greater than that in the five months after August 1974.
If retail sales, for example, were weakening this time at the same rate as in 1974-75, they would be $78.5 billion in June 1980 rather than the actual $75.4 billion.
Talk of an early recovery from the downtrend in the economy has increased in recent weeks. To the extent that such talk is based on genuine signs of a subsequent recovery, it is sound. There are such signs, although they do not abound as yet.
An early recovery would be similar to the early recovery from the downtrend that began after August 1974, not after November 1973. By April 1975, the economy was on the way up again, only eight months after August 1974, but 17 months after November 1973.
The relatively greater weakness in demand today than in 1974-75, and the relatively lesser weakness in supply, at least hint that a turnaround will be a little more than eight months in coming this time.
That is, we may have to wait a little longer in order to enable production to effect a sounder relationship to demand.