COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1368

The Mildest Recession: Output, Profits, and Stock Prices
as the U.S. Emerges from the 2001 Recession

William D. Nordhaus

May 2002

This essay 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.

Keywords: Recession, Profits, Stock prices, Returns

JEL Classification: E3, E4