Biological
and medical science helps us to understand why most of us won’t live past 80
much less reach 100. There exists a lot
of science that helps us to explain why our bodies and minds finally get old
and cease to function. Sadly, there is no such science to help us understand
why expansions do not usually hit their fifth anniversary much less their
eleventh. There is, of course, a lot of pop science but like pop music, pop
science has its limitations and annoyances.
Consider
what seems to be accepted lore when it comes to recessions. Like a runner in
the last mile of a marathon, the economy gets pooped because it runs out of
gas. The runner keeps asking her body to take more steps, but the process of
running the first 25 miles has eliminated a lot of internal resources. The carbs
are gone. The fat is gone. The tank gets empty.
Even worse
is when the runner tries to catch up to the top runner and sprints to the
finish line. The picture is not pretty.
Why not
apply this runner stuff to the economy? In that case we would say a recession
comes after a time period of strong growth in which we deplete a lot of
resources. As we try to keep the economy running hot, it finally simply cannot
grow as fast because we have fewer extra resources laying around to bring into
the production process. The economy then sags.
It’s a very intuitive
narrative. I decided it was time for me to get back into the data. This time I looked at some macro statistics that might shed some light on this resources/recession
story. I could have tried a lot of different approaches, but I chose this one. This
blog is not a dissertation and it isn’t even a good journal article. So
whatever conclusions I draw here today should be subject to a lot of hemming
and hawing if not outright laughing and giggling. But it is food for thought and
your reactions might lead to subsequent attempts to marshal data relevant to
our topic of recessions running out of steam.
The table
below assembles some real GDP data for out purposes. I am looking at
macroeconomic growth before each of the seven recessions in the USA between
1969 and 2019. In the first column is a number that I calculated to represent the
strength of recent macroeconomic growth. I calculated the average of the growth
in the economy for the 10 quarters before the start of each recession. The
simple idea is that a large number suggests a strong tax on resources before
the beginning of the recession.
Notice that before the 73/74 recession the
economy grew by 6 percent per year on average. That’s very strong growth.
Notice also that the economy averaged growing at a mere 1.9% per year in the 10 quarters before the beginning of the 81/82 recession.
These seven numbers in the first column alone do not
shed enough light on former growth rates of the economy and a resulting recession.
Sometimes the economy grows rapidly before a recession; sometimes it does not.
Here is where we could try a lot of other approaches and I chose one.
The second column
in the table is the average annual growth rate of the US economy in the 10
quarters before the most current 10 quarters. Comparing column 1 to column 2
let’s us see if the economy grew faster in the latest 10 quarters before each
recession. It creates a little more perspective than just looking at column 1.
The third column subtracts column 2 from column 1. A negative result means the
US economy grew slower in the latest 10 quarters compared to the previous 10. What
do these additional numbers tell us?
First, the
1973/74 10 quarter growth average was not only large absolutely but it was much
stronger than the 2% annual growth rate prior to that. Clearly there was a
strong increase in economic growth before that recession.
Second, the
case of the 81/82 recession shows that the 1.9% rate of growth was not only low
in the 10 quarters before that recession but it was also very low compared to the annual
growth in the previous 10 quarters of 5.3% per year.
These first
two points suggest that both stronger and weaker economic growth can precede a
recession. The resources issue is thus unresolved.
In four of the
seven recessions, the economy slowed in the 10 quarters before the recession
compared to the ten quarters before that.
Your minds
are spinning. Is this the only way to test if strong or stronger growth causes
resource restrictions that lead to recessions? Clearly not. Why choose 10 quarters?
What happens to the results if I chose 8? Or 12? Or maybe real GDP is not
sufficient for the task. Perhaps we could compare real GDP growth to a measure
of total productive capacity like potential Real GDP? Or maybe one could examine
prices of key resource inputs like labor or energy.
This case is
not closed. But it was fun getting it started. After 10 quarters, is the US
economy going to run into resource constraints that lead to a recession? Or is
that pop science? If not resource constraints, then what else might cause the eighth recession since the early 1960s.
Notice I have a line in the table for the 2019 recession. If one started in 2019 it would not be because of resource constraints. The economy has been averaging around 2.6% per year over the last 10 quarters and the last 20 years. I don’t see a recession coming because of that.
Notice I have a line in the table for the 2019 recession. If one started in 2019 it would not be because of resource constraints. The economy has been averaging around 2.6% per year over the last 10 quarters and the last 20 years. I don’t see a recession coming because of that.
Table
Recession Average Annual Change Real GDP
Years 10 QTRS** 10 QTRS*** Diff
69/70 3.7 5.6 -1.9Years 10 QTRS** 10 QTRS*** Diff
73/74 6.0 2.0 4.0
80 4.7 4.1 0.6
81/82 1.9 5.3 -3.4
90/91 3.8 3.9 -0.1
01 4.4 4.4 0.0
08/09 2.4 3.7 -1.3
19* 2.6 2.6 0.0
* 2019 is not a recession year. This line assumed a recession began in that year.
** 10 Quarters before the recession began
*** 10 Quarters previous
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