Gas Shortage
So far, the economy has avoided some of the shocks of the 1970s. Unemployment is still roughly half where it was then. And unlike these drivers in 1973, you can still get gas for your car.
By John W. Schoen Senior producer
updated 7/7/2008 9:48:51 AM ET 2008-07-07T13:48:51

Rising food and gas prices, falling home values and more job losses are making readers pretty gloomy. So just how bad is the current economic slump compared to other downturns?

With record oil and commodity prices, declining home prices, a poor stock market, uncertainty over the upcoming election, and continuing military operations in the Middle East, the average citizen is in an extremely foul and gloomy mood. When was the last time we had such a confluence of negative forces affecting the typical U.S. consumer?
Michael C., address withheld

There have been five official recessions in past 35 years. The most recent ones were fairly mild. So if you were born after 1965, you haven’t been through a nasty recession as an adult. Yet.

For some people, the mild 2001 recession didn’t even feel like a downturn. Initially sparked by the bursting of the Internet stock bubble, the 9/11 attacks put consumers and employers in a gloomy mood.

But the overall economy proved to be pretty resilient — helped by a flood of money in the form of interest rate cuts by the Federal Reserve.  Unemployment — the most painful impact of any recession — peaked at 6.3 percent in June 2003, long after the recession officially ended.

Although the jobless rate was up significantly from the late 1990s, that dot-com job market was one of the tightest in memory. College kids were getting five-figure signing bonuses to work for Internet companies with no earnings. When the music stopped, some of them had to go find real jobs.

The previous recession, in 1990-91, included some of the elements we have now: A war, a soft housing market with declining home prices in some areas, a gloomy consumer and a jobless rate that hit 7.8 percent before the economy began to recover. (The current rate is 5.5 percent.)

But that early 1990s event was relatively short. As measured by gross domestic product, there were two-back-to-back down quarters, and it was over. In the fall of 1990 the stock market fell 20 percent — and then began one of its best decades in history.

The 1980-82 recession was a different animal. In fact, it was officially two back-to-back recessions — both of which were the result of the Fed's inflation-killing interest rate policy that would be all but unimaginable today.

In 1979, after a growth and inflation roller coaster that lasted most of the decade, short-term rates were nearly 10 percent — five times the current level — and prices were still out of control. So the Fed decided to snuff out inflation once and for all by doubling rates to nearly 20 percent in April 1980. GDP fell at a 7.8 percent rate in one three-month period.

When the Fed cut rates back to 9 percent in July 1980, the first recession of the '80s officially ended.

But the inflation monster was still breathing, so the Fed doubled rates to 20 percent again by July 1981. Now GDP fell at an 11 percent rate.

From November 1980 to July 1982, the stock market dropped 24 percent.  By the end of 1982, unemployment hit 10.8 percent.

But this time, the medicine worked. Once the Fed let go of its stranglehold the second time, the economy perked up and inflation receded. The stock market soared, kicking off one of the longest and strongest bull markets in history.

The early 1980s downturn capped the end of what was, in many ways, the worst decade the U.S. economy faced since the Great Depression, coming after another deep downturn that officially lasted 16 months and ended in November 1973. In that event unemployment peaked at 9 percent and the stock market fell 45 percent.

But those “official” recession dates don’t account for the pain caused by a prolonged run of high inflation that destroyed wealth and spending power.

Economists still debate the causes of the 1970s-era stagflation. But there’s little disagreement about the damage it inflicted. Stock prices ended the 1970s about where they began; inflation cut the dollar’s buying power by more than half. Every time you got a raise, inflation ate it up. For nearly a decade, it seemed as though there was no cure.

The source of the current downturn is very different — and may be as difficult to manage.

The current slump began with the overstimulation of consumer borrowing by both the Fed and the financial services industry. We’ve all borrowed to buy houses, cars, college educations, home remodeling, vacations, etc.

Now with home prices falling, we no longer have the home equity to borrow against. We have to pay off the bills from all that borrowing before we can spend again.

Banks are in the same boat: Thanks to deregulation, commercial and investment banks used ridiculous degrees of leverage on investments that turned out to have much less value than they thought.

This would be bad enough without the impact of commodity inflation on a global economy fueled by an entirely new set of players: developing nations. That growth has helped fuel the American borrowing binge, so we’d all better hope it continues. But as long as rapid global growth is the only option, pressure on commodity prices, including oil, will remain high and inflation a very real problem.

So far, the numbers don’t add up to the 1970s: Unemployment is still roughly half where it was then. You can still get gasoline for your car.

The worry is that we’re at the 1972 stage of the 1970s. Within the past month or so, economic forecasters have been pushing back their estimates of when the U.S. economy will recover. We now hear a lot more about a “double dip” — things perk up a bit thanks to the massive stimulus checks and rate-cutting by the Fed but turn down again in late 2008 or early 2009.

The outlook might be more promising if we saw a serious, focused government response. Our energy policy is broken, but after three tries in the past seven years it seems unlikely we’ll get a good one in place before next year.

The housing bill has been debated for a year now: We may get one later this month, but it remains to be seen how badly watered down the final version will be.

Unless the 3 million or so consumers who face foreclosure this year can get back on track, the impact on spending will continue to weigh on all of us. And until home prices begin to recover, the collective assets of American homeowners continue to decline, putting further pressure on consumer spending, which accounts for 70 percent of the U.S. economy.

How many Americans are working two jobs to help cope with gas and food increasing?
— Cheryl G.,Willowbrook, Ill.

About 7.8 million Americans — or about one worker in every 20  — held more than one job in June, according to the employment data released Thursday by the Bureau of Labor Statistics. Some of those people may have three jobs or more. The BLS only asks if you work more than one. And it doesn't ask why.

That’s up a bit from last June, but as a percentage of the work force, the number of people working more than one job has held fairly steady since the end of the last recession in 2001.

Unfortunately, all that the extra work — on average — hasn’t paid off very well. Adjusted for inflation, the average weekly paycheck has barely budged since then. That’s one reason American consumers are feeling so stretched: The cost of gasoline, food and other household bills is going up faster than their paychecks.

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