What a severe recession and a weak recovery look like in just one graph

The Chicago Fed releases a monthly index for national economic activity. Their latest release: Index shows economic activity weakened in April.

Now, that’s not to say that activity contracted as it would during a recession, but the pace of growth slowed rather dramatically from March to April. If you want more technical information, go to the Chicago Fed’s site or to this post on Calculated Risk.

Here’s Calculated Risk’s graph of the data from the Chicago Fed index:

Let me explain a few things about what you’re seeing. The Chicago Fed index uses zero to indicate typical trend growth in the American economy. Any reading below -.7 indicates actual contraction. Look at the 1974 recession (recessions are the shaded areas). The recession began with weaker than trend growth, but nothing extreme. When the economy declined, it did so precipitously, but then rebounded just as fast and was followed by several years of above-trend growth that more than made up for the sharp decline.

By contrast, the 2007 recession started with a steep drop, followed by an even steeper one. Beginning in early 2009, we saw a quick rebound, but since summer of 2009 — when the recession was officially declared over — we’ve spent more months with below trend growth than above. This is why so many national commentators and even regional ones like me are clamoring for policies from the Fed and others that would fuel faster growth. Many people believe inflation will spike if the Fed continues its extraordinary measures of recent years, but so far inflation remains considerably below target and unemployment considerably above — and the recovery continues to be weak and choppy, weighed down especially by housing.