Saturday, July 10, 2010

Recession Frequency Was Much Higher Pre-1990

There have been a lot of comparisons of the most recent recession to the Great Depression and to previous post-WWII recessions, for example see the Minneapolis Federal Reserve's website on The Recession and Recovery in Perspective.  While most comparisons have been between the length and severity of the 2007-2009 recession to previous individual recessions, what has received considerably less attention is the frequency of recessions over various periods of time.  That is, it's not only the length and severity of individual recessions that is important, but it's also important how frequently recessions occur over periods like 8, 10 and 12 year periods. 

The top chart above shows the frequency and duration of the 12 recessions since WWII, according to the NBER.  Using "inter-ocular least squares analysis" (i.e. "eyeballing" the data), it seems pretty clear that recessions were much more frequent in the: a) mid-1940s to early 1960s period, and b) early 1970s to early 1980s period, than in the post-1982 period.  Maybe one of the reasons the most recent recession seems particularly severe is that we "got spoiled" in the 25-year period between 1983 and 2007, when the economy was in recession only 6.3% of the time, compared to the previous 25-year period when the economy was in recession 23% of the time from 1958 to 1982. 

The next three charts show the percentage of months in recession over: a) rolling 8-year periods, b) rolling 10-year periods, and c) rolling 12-year periods.  Over the most recent 8-year period (July 2002 to June 2010), the economy has been in recession 20% of the time, down from 25% a year ago.  In contrast, the economy was in recession 20% or higher during 62% of the 8-years rolling periods between 1953 and 1989.  Similar patterns emerge for the 10-year and 12-year rolling periods: the economy was in recession much more frequently between the 1950s and 1990 compared to the post-1990 period, and we definitely got "spoiled" in the 1990s and 2000s, with long periods of time during which the economy was expanding, not contracting. 

For example, over 12-year periods, the economy was in recession for only 6.25% of the time for more than half of the 1990s and  half of the 2000s, representing the longest periods of ongoing economic expansion since WWII. So not only has the most recent recession been less severe than some of the previous recessions by certain measures like the maximum unemployment rate, but the recession frequency during the most recent 8-, 10- and 12-year periods has been much lower than the pre-1990 period.  

Bottom Line: It could be a lot worse, and in fact when it comes to the frequency of recessions, it was a lot worse in much of the 1950s, 1960s, 1970s and 1980s than recently in the 1990s and 2000s.

30 Comments:

At 7/11/2010 10:06 AM, Anonymous Anonymous said...

Stock market returns appear to be inversely related to how recessionary the economic environment over the last decade.
There have been six points since 1955 when the economy has spent 25% of the prior decade in recession, 55, 58, 75 and 82. Average annualized returns over the subsequent 3, 5 and 10 years have been 14.4%, 16.2% and 14.4%, respectively, versus average returns for the whole period of 10%.
Conversely there have three periods when the previous decade has been been a boom period (5-10% spent in recession), 69, 92 and 2000. Stock returns from these starting points average -0.8%, 5.3% and 5.3% over subsequent 1, 3 and 5 years respectively.
Around 23% of the last decade has been spent in recession and unsurprizingly sentiment is as depressed as at the 55, 58, 75 and 82 lows. If the pattern holds stock returns will be much higher than average over the next few years.

 
At 7/11/2010 10:50 AM, Anonymous morganovich said...

i would actually argue that it was much better.

small frequent corrections keep excesses out of the system. it is precisely that we have done everything in our power to derail the downturns of the business cycle that has left us with the massive debt bubble we currently have.

the price of the "great moderation" has been the inflation of bubble after bubble and a 10 year drop in the dollar as monetary policy has gone to the dogs.

this recession is so brutal and difficult to recover from because we have not had a serious recession since 1982 and have has terribly loose monetary policy for a decade since the .bust. (and bad monetary expansion even preceding that.)

US consumer credit (not including mortgages) tripled from 800 bn to 2.4 tn in 14 years from 1994 -2008. mortgage debt exploded. we exceeded 100% consumer debt to GDP in 2008 for the first time since 1929.

the great moderation is a complete misnomer. what it really was was the great excess. monstrous imbalances were allowed to build up unchecked and actually encouraged by misguided monetary policy. like the sailboat that has all its canvas out because it's been such a moderate day for so long, we get knocked over and dismasted when the squall comes because we were too complacent about the weather.

now, rather than a quick dip and recovery, we face a sharp contraction and a long struggle back.

the illusion that we can control the business cycle is one of the most dangerous idea in politics.

 
At 7/11/2010 10:50 AM, Blogger PeakTrader said...

The charts reflect improvements in U.S. monetary policy.

The U.S. had deep depressions in the 1870s and 1930s. Monetary policy averted a deep depression in the 1970s (although there were four recessions from 1970-82 in a period of inflation).

From 1982-07, monetary policy continued to improve smoothing-out business cycles, resulting in a long-boom, with only two mild recessions, while living standards rose at a steeper rate.

However, in 2007, tight domestic credit caused a recession. The Bush tax cut in early '08 gave the Fed time to catch-up easing the money supply. We were on a path to a mild recession, until Lehman failed in Sep '08, which froze the credit market and tipped the country into a deep recession.

Another "bubble," would've been best for the country (the natural process would've been more of a production than a consumption bubble, similar to 1995-00, rather than more of a consumption than a production bubble, similar to 2002-07).

However, the Obama Administration has stated we cannot afford another bubble, and it subsequently turned out to be correct, because it squandered trillions of dollars. So, the U.S. is in a much weaker position.

 
At 7/11/2010 11:05 AM, Anonymous gettingrational said...

The prolonged "prosperity" periods could have been because of the acceptance of debt in the U.S. The spending binge by governments has resulted in total gov't debt that is 130% of GDP (via Jesse's Cage American). As the generation that grew up in The Depression faded credit aversion faded also.

The Depression influenced most to pay with cash and for government entities to borrow with caution. When cash ran out then spending, by consumers, business and gov't) ran out. The frequency of recessions became less as debt prolonged economic cycles to reckless lengths despite the lack of cash. This IMHO.

 
At 7/11/2010 11:26 AM, Blogger PeakTrader said...

The U.S. had a quick and massive "Creative-Destruction" process mostly from 2000-02 in a mild recession. So, it's unnecessary to have severe recessions to clear out excesses.

Smoothing-out business cycles should be the objective of monetary policy, because economic boom/bust cycles use resources inefficiently both in the boom and bust phases (i.e. creates periods of strain and slack).

Of course, fiscal policy should be expansionary in downturns and contractionary in expansions. It may be best when deficits and surpluses of government budgets average zero over time.

 
At 7/11/2010 11:45 AM, Anonymous morganovich said...

peak-

that's simply untrue. we had a shallow GDP recession in 2000-1 because we opened the monetary spigots and used massive amounts of debt to try to dodge the correction. that served to take the imbalances that were present and magnify them until they reached crisis levels.

equity bubbles clean up rather easily. debt bubbles are much, much harder.

the current mess is the direct result of greenspan's absurdly loose monetary policies and bubble denial.

we cured a hangover by getting drunk again, but at some point, you need to sober up and we're worse off for not having handled it.

bubbles and debt imbalances are the natural result of long stable periods. it's a non avoidable part of the business cycle. if you know something will go up 5% a year, you're willing to pay more and more until you have already NPV'd all the future gain and built up debt and risk. it is the very perception of safety that encourages this risk taking. nothing can remove that from a capitalist system.

what we need is a fed that will be more aggressive in taking the punch bowl away before the party really gets out of hand, not one that cheer-leads while we wreck the house and then buys free beer for everyone to try and get the party going again, encouraging and inflaming the moral hazard rather than reducing it as volker knew how to do.

greenspan has done untold damage and then decided to skip town when he could see the gig was up. history will and should judge him very harshly. helicpoter ben is a chip off the old block.

free money is not the answer. the answer is to keep everyone on their toes and prudent, not to fan the fires of speculation until we crash.

 
At 7/11/2010 12:11 PM, Anonymous Anonymous said...

You get really big forest fires when you act over time to prevent small forest fires. Small forest fires clear the undergrowth before it accumulates to the point where it threatens to stsrt a major fire.

Are recessions the same? Do the small recessions that clear small problems reduce the chance of large recessions?

 
At 7/11/2010 12:16 PM, Blogger PeakTrader said...

Morganovich, you make many false assumptions. The 2000-02 Creative-Destruction process was a correction and it made U.S. firms stronger. Information-Age industries produced more with less, while older industries shifted into higher quality and more profitable "core" goods.

A deep depression was completely unnecessary. It would've resulted not only in less debt, but even less assets and goods, i.e. a decline in the real economy. You should be praising the Greenspan Fed for smoothing-out business cycles and maximizing U.S. living standards at a sustainable rate.

 
At 7/11/2010 12:22 PM, Blogger PeakTrader said...

Anon, a drought also clears the undergrowth. How often or how long do you want droughts?

 
At 7/11/2010 12:55 PM, Blogger Ron H. said...

morganovich said: - what we need is a fed that will be more aggressive in taking the punch bowl away before the party really gets out of hand, not one that cheer-leads while we wreck the house and then buys free beer for everyone to try and get the party going again, encouraging and inflaming the moral hazard rather than reducing it as volker knew how to do.

I don't believe I've seen a better analogy. I hope you don't mind if I save this gem for future reference.

 
At 7/11/2010 1:01 PM, Blogger PeakTrader said...

Anyway, I think, the last thing people want when there's a forest fire is a drought. So, it was appropriate the Fed eased the money supply in the early 2000s.

 
At 7/11/2010 2:10 PM, Anonymous morganovich said...

peak-

you are missing the fundamental irreconcilability of the 2 things you seems to want.

you cannot simultaneously bail out those who made bad decisions before the crisis and foster the kind of schumpterian creative destruction needed to return to sustainable growth.

the two are inevitably at odds. there is no such thing as a schumpterian bail out.

there can be no evolution without natural selection. you seem to think you can have your cake and eat it too. we are now reaping the bitter fruit of the monstrously over aggressive attempts to mitigate the 2001 recession. unlike the 2001 bubble which was mostly equity and therefore resolved itself through a market process, this debt bubble will linger. such bubbles are far more dangerous for precisely that reason.

all we are doing is kicking the can down the road and making the inevitable reckoning worse when it comes, just as we did with the recklessly loose monetary policy of 2001+ in an attempt to smooth the business cycle. anon's forest fire analogy is quite apt - by preventing the fire then, we just built up more fuel for the next one, enough to cause the worst downturn since the 30's. in forest fire terms, we saved the brush in 2001 at the expense of the trees in 2008.

ron-

thanks. use it with my blessing. i'm in favor of anything that helps get that point across. i fear we have truly lost our way from a monetary policy standpoint, mistaking bubbles for growth and bailouts for prosperity. the level of moral hazard supported and encouraged by this system is extremely dangerous.

the US will not be able to pay down debt like it did in the 40's when we were the only remaining industrialized power and world demand was massive as it rebuilt from the war. it's difficult to even imagine the political will to take this country back to budget surplus, particularly on a GAAP basis that accounts for entitlements.

my great fear is that with all the lenders of last resort exhausted, we will turn to the true last resort: the printing press. the effects of monetizing this level of federal debt and deficit upon savings and investment would be catastrophic, and worse, would predominantly punish the prudent to the benefit of those who have borrowed recklessly.

virtually all empires ultimately fall due to fiscal profligacy. absent some very strong near term action, we are on a pace to join them. once external federal debt passes about 90%, terrible debt deficit spirals tend to start. current projections have us there soon. might the US get a bit more leeway as the issuer of the reserve currency, perhaps, but not that much more. the consequences of this would already be showing up in our bonds absent the fed buying 30-40% of the auctions last year and providing unprecedented price supports.

 
At 7/11/2010 2:33 PM, Blogger juandos said...

Personally I think Milton had a better idea, the Fed is a source of trouble...

here

here
and one more (10 minute video clip): here...

 
At 7/11/2010 3:30 PM, Anonymous grant said...

EXCESSIVELY INCOMPETENT PEOPLE ARE ELECTED TO RUN THE SYSTEM.

 
At 7/11/2010 3:46 PM, Anonymous grant said...

Morganovich:
PT? has it partly right but you are almost totally wrong.

 
At 7/11/2010 7:54 PM, Blogger PeakTrader said...

Morganovich says:

"You cannot simultaneously bail out those who made bad decisions before the crisis and foster the kind of schumpterian creative destruction needed to return to sustainable growth."

Do you really believe all the major banks in the U.S. made "bad decisions." It was more likely the government created economic conditions, or a systemic problem, that caused failure.

 
At 7/11/2010 8:07 PM, Blogger PeakTrader said...

Morganovich, the U.S. economy in the 2000s produced more with less, and U.S. corporations had a record 20 consecutive quarters of double-digit earnings growth, which raised living standards.

It was unnecessary to turn the 2000s into the 1930s, just like it's unnecessary to create a Lost Decade in the 2010s by preventing another bubble.

Bargains induce demand. Why take that away from the American people to reduce their spending? It's better to increase employment and income than force them to save through fewer bargains.

 
At 7/11/2010 8:41 PM, Anonymous grant said...

Most folks think that the meltdown started from President Reagan's deficits but the real problem started in the President Clinton era when he repealed the Glass-Steagall act.

 
At 7/11/2010 9:03 PM, Blogger bix1951 said...

the problem started with Adam and Eve
overweight is overweight
we have too much
we live too well
the government gooses us to produce more
nobody will give anything up
we could live happily on much less
but the media thrive on consumerism
summertime

 
At 7/11/2010 9:09 PM, Anonymous morganovich said...

peak-

the truth is very complicated. to say "it was the government" or "it was the banks" is just too much of a simplification. it was a confluence of factors fueled by massive monetary looseness and a willingness to gamble driven by the well established "greenspan put".

did CRA cause huge problems? absolutely. but the banks bear much blame as well, as do borrowers, the rating agencies, and perhaps most of all the fed.

your argument about "why take away from the american people to curb their spending" is a specious framing of the issue. you are assuming the right to cheap money and that such constant access has no ill effects, that somehow the "natural" level for interest rates is a very low one.

it was not the fed hiking rates that caused the debt bubble. you can;t cause a debt bubble with high rates. the bubble came from low rates and from consumer borrowing that was both unsustainable and, in the event, unsupportable by cash flow.

we had a party, and now we are in debt from it. you are mistaking a bubble for prosperity. bubbles burst. if you let them get big enough (as the fed did) they do a lot of damage when they do. now we have taken huge amounts of the debt onto the federal balance sheet.

is there some point at which you think deficit spending at both the personal and governmental level has to stop? you seem to just want to spend more and more as though deficits and debt are a panacea.

you speak of all the growth and earnings, but look at the foundation upon which it was built. the proportion of S+P 500 EPS from financial companies was about 40%? that's where the growth was. that was driven by low rates, and it led us to overshoot and crash.

rather than learning from the mistake, you are advocating doing it again.

 
At 7/11/2010 9:23 PM, Blogger juandos said...

"we have too much"...

What? You got a mouse in your pocket bix?

"the real problem started in the President Clinton era when he repealed the Glass-Steagall act"...

Thank you Seeking Alpha: It should be remembered that before the passage of the Graham-Leach-Bliley Act, we had the debacle of the Savings and Loan (S&L) crisis. You'd think that with Glass-Steagall on the books, something like the S&L crisis would not have occurred. After all, S&Ls didn't have direct ties to investment banks and brokerage houses. Additionally, S&L regulators knew of the existence of Glass-Steagall...

 
At 7/11/2010 11:50 PM, Blogger Ron H. said...

One of the most thorough explanations I have encountered to date of the many contributors to our current economic crisis is the book "Meltown" by Thomas E. Woods Jr.

 
At 7/11/2010 11:52 PM, Anonymous grant said...

Morgqanovich:
Yes thats the problem as you say "it covered almost everything"the whole financial system.It's incredible how nothing was done to fix it at the time.
No prosecutions have taken place yet. But the Democrats are now taking full advantage of the situation in pushing their agenda through with all legislation meant to correct it.

 
At 7/12/2010 12:43 AM, Blogger Ron H. said...

morganovich said:

"my great fear is that with all the lenders of last resort exhausted, we will turn to the true last resort: the printing press. the effects of monetizing this level of federal debt and deficit upon savings and investment would be catastrophic, and worse, would predominantly punish the prudent to the benefit of those who have borrowed recklessly."

As one of the prudent, I'm not at all interested in being punished. I sometimes wonder if it wouldn't be in my own best interest to borrow every cent I can, so that when the printing presses start in earnest, the Fed will, in effect, pay my debt for me.

 
At 7/12/2010 2:03 AM, Blogger PeakTrader said...

Morganovich, I've explained above how the government drained dollars from the private sector. Your solution to a lack of liquidity is less liquidity.

Also, you believe the efficiencies and innovations that created and captured enormous real assets, goods, and capital for the U.S. masses in the global economy were too great and a depression was needed to clear the "excesses."

However, that's completely unnecessary. This is what I wrote over a year ago:

Global Imbalances

It was inevitable global imbalances would correct. The question was would they correct slowly or suddenly. The U.S. had a virtuous cycle of consumption and investment. Export-led economies sold their goods too cheaply and lent their dollars too cheaply. Consequently, the U.S. overconsumed and underproduced, while export-led economies overproduced and underconsumed.

The U.S. housing boom (and related goods) helped raise U.S. actual output towards potential output, which caused export-dependent economies to overproduce even more. The U.S. consumption-investment cycle turned into a boom, which was unsustainable.

Global imbalances began to correct slowly in 2007, until Lehman failed in September 2008, which froze the credit market, and caused the correction to accelerate. Nonetheless, the correction was inevitable.

There was diminishing U.S. marginal utility, since Americans bought too many goods, and would buy more goods only if prices fell further. Export-led economies had production strains, while lending their dollars to the U.S. more cheaply. Export-led countries exchanged their goods for U.S. dollars instead of U.S. goods, and received increasingly smaller gains-of-trade through inflation (e.g. postponing or never buying U.S. goods), negative real interest rates (e.g. low long-term and short-term bond yields), and in the foreign exchange market (receiving fewer units of their currencies per dollar).

Restrictive monetary policy and contractionary fiscal policy slowed U.S. economic growth. U.S. consumers paid export-led economies dollars for their goods, and then those dollars were exchanged for mostly U.S. Treasury bonds. Ultimately, dollars flowed from U.S. consumers to the U.S. government. However, the "excess" capital flowed to borrowers who weren't creditworthy, through U.S. financial firms, to clear the market.

So, the U.S. government needed to refund U.S. consumers and financial firms. The Bernanke Fed kept a restrictive monetary stance for too long (i.e. the Fed Funds Rate at 5 1/4% from June 2006 to September 2007), and fell behind the curve easing the money supply. The Bush tax cut in early 2008 gave the Fed time to catch-up. The Fed eased the money supply, although commodity prices reached new highs till mid-2008.

This is the first severe recession, since 1981-82. However, not all recessions are the same. In the 1981-82 recession, there was too much money chasing too few assets and goods. In the current recession, there's too little money chasing too many assets and goods.

Rather than clear the market of excess (private) assets and goods, Obama has chosen to destroy (rather than consume) those excesses, while creating public assets and goods (through massive government spending rather than a large tax cut). There was a strong expansion after the 1981-82 recession. However, Obama may prevent a strong expansion, because of capital and output destruction, while creating inefficiencies in production.

 
At 7/12/2010 8:52 AM, Anonymous morganovich said...

peak-

i continue to think you are misdiagnosing the problem. the problem is debt, not tight money. interest rates literally cannot be lower. the fed funds rate is essentially zero, yet borrowing has not recovered.

why do you think that is?

it's because we have debt that needs to be paid down. money that consumers get is going to debt reduction. they only spent around 30% of stimulus dollars when they got tax rebates.

i know you hate the idea, but facts are facts: debt has to be paid (or losses taken). no amount of "damn the torpedoes, full spend ahead" is going to work right now. we have some big overhead to work off, and the ineffectual government spending that is racking up such massive deficits is not and will not drive growth. worse, it to is running up a huge bill that will depress future growth.

in the next 2 years, global banks have $5tn in short term debt to roll over. that's enough to crowd out a great deal of both private and governmental borrowing and will show you the effects of debt on lending and growth.

i don't think you understand the 81-2 recession. it was brought on by a massive interest rate hike as volker broke the back of the inflationary spiral. you describe the recession as having too much money chasing too few goods, but money supply growth then was well below that of the late 90's or 2006-9. the fed funds rate hit 18% in 81-2. there was too much inflation prior, but that recession was all about wiping it out.

i don't know how to convince you that you cannot spend your way out of debt. it simply does not work. the keynsians were bailed out of the impending FDR disaster by the second world war. we will have no such exogenous aid this time.

it is precisely the "drive spending and all will be well" short term thinking you champion that got us here. the depth and duration of this recession is the direct result of the greenspan put fanning the flames of numerous other economic imbalances and perverse incentives until they were so great we could not deal with them any more.

this is not a "normal" recession. it's a debt bust like 1929. it's not a short term disruption in the "animal spirits" of the economy, but rather the exhaustion of economic ammunition as we have already spent years of future earnings and have run out of ability, not desire, to live beyond our means.

if spending > income, then debt builds up. to pay it spending < income is required. you seem to think we can live in the first state in perpetuity and that it is somehow desirable or even our duty to facilitate such a thing. that assertion is as dangerous as it is untrue.

you cannot manage downturns out of the business cycle. it's not possible. for creative destruction to occur, there must be destruction. bailing everyone out by "clearing the market of excess goods" is the antithesis of creative destruction. you are missing the contradiction in what you propose and expecting to have your cake and eat it too.

there is no such thing as a schumpterian bailout. the course you propose prevents creative destruction and just piles more fuel on the pile for the next blow up as yet more imbalances are created.

 
At 7/12/2010 1:21 PM, Anonymous grant said...

What about streetcar drivers on $100,000 a year.Didn't wage inflation contribute to the compounding problem of loss of competitiveness and therefore the explosion of imports.
America has been losing market share to China/Asia for at least 10 yrs on labor intensive goods but at the same time wages were growing at a much greater rate than productivity.
The collapse of the rust belt states should have been taken more seriously as a warning of what was to come from losses of real jobs in manufacturing.
There are only 14 states that have 20-25% of their economy based in manufacturing industry:-Alabama,Arkansas,Idaho,Indiana,Iowa,Kentucky,Louisiana,North Carolina,Ohio,Oregon,South Carolina,Wisconsin.
Compare this to the golden era of America industry when the rust belt states were leading the charge and massive expansion was taking place.

 
At 7/12/2010 5:21 PM, Anonymous Anonymous said...

Your contention is entirely false.

You fail to take into consideration
1 the recursive nature of the markets,
2 their pricing by gold/oil,
3 the establishment of a fiat system by which the markets could be run up to mitigate and hide the next 1929 (which has already occured).

Recession frequency continues at the same pace it ever has. Nature does not change quickly.

 
At 7/12/2010 5:49 PM, Blogger PeakTrader said...

Morganovich says "we have debt that needs to be paid down. money that consumers get is going to debt reduction. they only spent around 30% of stimulus dollars when they got tax rebates."

Yes, consumers aren't getting enough money.

What would've 150 million workers done with a $5,000 tax cut over a year ago? Yes, they'd pay down debt, e.g. the highest interest rate debt first, and then would have more disposible monthly income to consume. So, the oversupply of houses, autos, imports, etc. would clear the market more quickly, and production would increase.

The 1981-82 recession was in many ways the opposite of the most recent recession. Not all recessions are the same.

 
At 7/12/2010 7:53 PM, Blogger PeakTrader said...

And you know what happens when production increases. Employment increases and consumption increases.

A virtuous cycle of consumption-employment takes place, where consumption creates employment and employment creates consumption, etc.

Before the cycle turns into a boom, the Fed will tighten the money supply in an attempt to sustain growth at an optimal rate (though price stability of goods & services).

Foreigners may absorb more dollars again (perhaps up to 6% of GDP). However, the Fed will compensate with a higher money supply.

To pay-down debt, Americans need to work longer and harder, which will add to future economic growth.

 

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