The R-word has been bandied about a lot lately. Like a bus that gets behind schedule on its appointed route, a recession will eventually arrive. It might not come on time but it will surely come. And when it comes the nation will suffer. Not everyone suffers and not everyone suffers the same, but no one wants that bus to arrive. So the longer the interval from the last "bus", the more pronounced the wondering gets about the next recession's arrival.
This wondering translates into all sorts of behaviors. One of them is pressure on those who command macroeconomic policy. We want the Fed to reduce interest rates, and we want the government to tax less and spend more.
So today is a good day to provide some background about recessions. I went to Wikipedia and found some interesting data to start the conversation. None of this predicts when the bus will arrive. None of this guarantees that you won't have to stand on the bus. It is mostly just JD for thought.
We always thought of recess as a nice time. We could get out of our rigid school desks and run to the playground. A recess meant an interruption in the normal process of reading, writing, and arithmetic.
A recession is an economic term that means the normal progress of economic growth gets interrupted in a noticeable way. A recession refers to those times that are less desirable for the economy. In the United States, we let the Bureau of Economic Analysis decide when recessions begin and end. They use a lot of information. For example, when JD sales go up, there is probably a recession. Just kidding. The BEA looks at many economic indicators including real GDP growth, spending on consumer and industrial goods, capacity utilization, unemployment, and more.
Since the press is not good with complicated things, the media proclaim a recession if real GDP falls for two quarters. If half of a year is yucky, they proclaim a recession.
So what do we know about recessions? (Some data is found in the table below.)
- Since I was a prickly lad of 14, we have had eight recessions in the USA. In almost 60 years, we had eight recessions. That means we have a recession just about every 7.5 years. Since the last recession ended in 2009 and today is 2019, we have not had a recession in about 10 years. The bus is late.
- The table shows the average time between recessions is 65 months. The 2000-01 recession was a very slow bus – it took 120 months to arrive. The 81-82 recession came only 12 months after the 1980 recession. So there is a lot of variability in when the next recession is coming.
- The average recession lasted 12 months. The one in 1980 was half of the average, and we had two occasions when a recession lasted for 16 months. The last recession took 18 months.
- During a recession, real GDP falls. The table shows the decline from the previous peak of real GDP to the lowest quarterly amount. The average decline in real GDP was about 2%. In the 2000-01, real GDP barely fell. In the Great Recession of 2007-09, real GDP fell by more than 5 percent.
- Naturally, the unemployment rate rises in recessions. In the Great Recession and in the 81-82 recession, it rose to almost 11 percent. The average peak unemployment rate across all eight recessions was 8 percent.
Predicting recessions is a lot like predicting when the next hurricane is going to hit Sanibel Island – and then trying to guess where and how long it will hover and how much damage it will do. The next recession or hurricane will likely not be the average one and knowing if it will be short and sweet like 90-91 or long and deep like 2007-09 is not easy.
It is too bad that our economic models don’t do a better job of predicting recessions. But like hurricanes, it is a lot more complicated than it looks. I guess we will continue to muddle through and hope for the best. Over-preparation is no better than under-preparation. We should be careful not to throw out the baby with the bath water.
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