The Mildest Recession: Output, Profits, and Stock Prices As the US

NBER WORKING PAPER SERIES

THE MILDEST RECESSION: OUTPUT, PROFITS, AND STOCK PRICES AS THE U.S. EMERGES FROM THE 2001 RECESSION

William D. Nordhaus

Working Paper 8938 http://www.nber.org/papers/w8938

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2002

This paper was presented at the April meeting of the Brookings Panel on Economic Activity. I am grateful for helpful suggestions from Ray Fair, George Hall, Ken Petrick, and members of the Panel. The views expressed herein are those of the author and not necessarily those of the National Bureau of Economic Research.

© 2002 by William D. Nordhaus. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. The Mildest Recession: Output, Profits, and Stock Prices as the U.S. Emerges from the 2001 Recession William D. Nordhaus NBER Working Paper No. 8938 May 2002 JEL No. E3, E5

ABSTRACT

This paper examines the state of the United States economy as it emerges from the 2001 recession. A comparison of several central economic variables indicates that the 2001 recession was the mildest recession in the postwar period. In light of highly differentiated characteristics of recessions, the paper suggests that we differentiate among downturns by a five-category “recession severity scale,” analogous to the Saffir-Simpson Hurricane Scale. According to this approach, the 2001 recession fits in the least severe box, a “category I recession,” along with the 1963 and 1967 non-recessions. The paper next examines the behavior of profits in recent years and shows that financial finagling has infected the aggregate profits numbers. Finally, the study constructs a measure of the forward-looking return on equities and concludes that the prospective real yield on equities in early 2002 is at its low point of the last half-century.

William D. Nordhaus Department of Economics Yale University 28 Hillhouse Avenue Box 208264 New Haven, CT 06520-8264 and NBER [email protected] 7KH0LOGHVW5HFHVVLRQ 2XWSXW3URILWVDQG6WRFN3ULFHVDVWKH86 (PHUJHVIURPWKH5HFHVVLRQ

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