A Tale of Two Crises–and Recoveries: Financial Crisis vs. COVID-19 Crisis Part 2: Economic Growth–Before and During the Crises

First a little background on measuring economic growth. The Bureau of Economic Analysis (BEA) compiles and publishes Gross Domestic Product (GDP) statistics, which measures the U.S. output of goods and services and is the benchmark for measuring economic growth. Quarterly GDP growth is usually expressed as a percentage that represents the rate at which U.S. economic output is either growing or contracting. The BEA releases two barometers of GDP growth:

1. the percent change from the previous period at an annualized rate, and
2. the percent change from the quarter of one year ago

Looking at the percent change from the previous period at an annualized rate can be useful in comparing the economic growth of different quarters, particularly during an economic expansion. It is also useful for identifying current trends if the economy is expanding or contracting from the previous quarter. However, the annualized rate assumes that the rate of change in the recent quarter would basically continue for four consecutive quarters. with some adjustments for seasonality and compounding effects. In severe economic downturns, the annualized rate could be somewhat misleading, because is unlikely a severe drop in one quarter would be replicated for another three quarters. In addition, the annualized rate could also be misleading in a quarter of economic growth following a quarter of severe economic downturn, because it would be unlikely that the economic growth percentage would be replicated for another three quarters. Looking at the percent change from the quarter of one year ago can provide insight as to how economic growth in a given quarter compares to the previous year. We’ll look at both measures. No matter how you look at it, the financial crisis was bad, but the COVID-19 crisis is worse.

The Financial Crisis

Following a brief recession after the turn of the century, an economic expansion began in December 2001 that lasted 73 months until December 2007. After a weak first quarter, economic growth was moderate during the last three quarters of 2007, ranging between an annualized rate of 2.2%-2.5%. However, by late 2007 there were signs that not all was well in the housing market, and those problems led to a recession that lasted 18 months, from January 2008 through June 2009.

Table 1 below shows the annualized rate change in real GDP for a given quarter versus the previous quarter during the financial crisis. When comparing economic growth to the previous quarter, negative economic growth occurred in the first quarter of 2008 and from the third quarter of 2008 through the second quarter of 2009. The worst quarterly decline was during the fourth quarter of 2008 at an annualized rate of -8.4%, which was followed by a decline of -4.4% in the first quarter of 2009. The decline of -8.4% in the fourth quarter of 2008 was the largest drop in GDP since the -6.1% fall in the first quarter of 1982. Table 2 below shows the percent change in real GDP for a given quarter versus the quarter of one year ago during the financial crisis. When comparing economic growth to the quarter of a year ago, economic growth declined in the fourth quarter of 2008 and the first two quarters of 2009. The largest decline from the previous year quarter was at -3.9% in the second quarter of 2009.

Table 1 – Percent Change from Previous Period in Real GDP – Annualized Rate

(Source: Bureau of Economic Analysis)

2007	2007	2007	2007	2008	2008	2008	2008	2009	2009
Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
0.9	2.3	2.2	2.5	-2.3	2.1	-2.1	-8.4	-4.4	-0.6

Table 2: Percent Change from Quarter One Year Ago – Real GDP –

(Source: Bureau of Economic Analysis)

2007	2007	2007	2007	2008	2008	2008	2008	2009	2009
Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
1.5	1.8	2.2	2.0	1.1	1.1	0.0	-2.8	-3.3	-3.9

The COVID-19 Crisis

The longest period of U.S. economic growth began in July 2009 following the financial crisis but abruptly ended in February 2020. The economic expansion lasted a record 128 months, superseding the previous record of 120 months for the economic expansion that lasted from March 1991 to March 2001. After a brief, temporary increase in early 2018 due to the tax cuts, economic growth was positive but already declining prior to the economic effects of COVID-19.

Table 3 below shows the annualized rate change in real GDP for a given quarter versus the previous quarter for the period leading up to the COVID-19 crisis and the start of the crisis. Table 4 below shows the percent change in real GDP for a given quarter versus the quarter of one year ago for the period leading up to the COVID-19 crisis and the start of the crisis.

No matter how you measure it, the economic fall caused by COVID-19 was dramatic and significantly more severe than the economic fall caused by the financial crisis. When comparing economic growth to the previous quarter, economic growth declined at an annualized rate of -32.9% in the second quarter of 2020, which followed a drop of -5.0% in the first quarter. The BEA began tracking quarterly GDP growth data in 1947. The second quarter drop was the worst on record, and much greater than the worst quarterly decline during the financial crisis, which was -8.4% during the fourth quarter of 2008. When comparing economic growth to the previous quarter of a year ago, the second quarter 2020 decline was -9.5%, significantly worse than the largest financial crisis quarterly decline of -3.9% in the second quarter of 2009.

No matter which barometer you look at, the decline in the U.S. economy caused by the COVID-19 crisis was bad – it was significantly worse than the economic decline during the financial crisis.

Table 3: Percent Change from Previous Period in Real GDP – Annualized Rate

(Source: Bureau of Economic Analysis)

2018	2018	2018	2018	2019	2019	2019	2019	200	2020
Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
3.8	2.7	2.1	1.3	2.9	1.5	2.6	2.4	-5.0	-32.9

Table 4: Percent Change from Quarter One Year Ago – Real GDP 

(Source: Bureau of Economic Analysis)

2018	2018	2018	2018	2019	2019	2019	2019	200	2020
Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
3.1	3.3	3.1	2.5	2.3	2.0	2.1	2.3	0.3	-9.5

For further information:

1. GDP Growth (and other national data) from the Bureau of Economic Analysis: GDP Growth
2. Info on Economic cycles from the National Bureau of Economic Research: Economic Cycles

CBEI Series: A Tale of Two Crises–and Recoveries: Financial Crisis vs. COVID-19 Crisis
Part 1: Causes and Cures
Part 2: Economic Growth – Before and During the Crises
Part 3: Unemployment – Before and During the Crises
Part 4: The Federal Reserve and Interest Rates