In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions of 1973–75 and 1981–82. Yet recovery from the latest recession started out much more slowly. For example, real gross domestic product expanded by 7.7 percent in 1983 after unemployment peaked at 10.8 percent in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2 percent in the third quarter of 2009. Although the fourth quarter showed much better numbers—5.7 percent—there are still no signs of an explosive takeoff from the recession.
We believe that two factors explain this tepid rebound. One is obvious: the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many, and high unemployment.