The Basics Of A Recession
Despite more than 18 months of warnings from economists, strategists, and other market experts, the United States economy has thus far avoided a recession.
True, the economy may not feel significant to the legions of people battling continuously rising inflation, but official and unofficial measures suggest that we are not now in a downturn. If anything, the US economy has proven to be extraordinarily resilient.
Despite this, survey after poll reveals that Americans are deeply concerned about the state of the economy. Given the gap between economic facts and the country's general mood, it is reasonable to wonder: if this is not a downturn, then what exactly is a recession?
For one thing, a recession is the most terrifying creature in the average investor's closet of fears. It is easy to see why. Recessions are feared because they can result in reduced housing prices, decreased stock prices, and unemployment.
It is also unsettling that an exogenous shock, such as the COVID-19 crisis or the Arab oil embargo of 1973, might create or exacerbate a recession; soaring interest rates; or ill-conceived legislation, such as the Smoot-Hawley Tariff Act of 1930.
The bottom line is that recessions are unavoidable. As unpleasant as they may be, they are unavoidable in every dynamic economy. Furthermore, if you are ready for the next downturn, there will be plenty of possibilities when it ends. As a result, the more you understand about recessions, the better.
Following the Great Depression, a phrase initially thought to be milder than "panic" or "crisis," the term "depression" for an economic downturn sounded especially dreadful. Economists began to refer to the situation as a "recession" instead.
Currently, "depression" refers to a severe and intractable recession, although there is no precise definition of the term in economics. The Pandemic Recession resulted in unemployment levels not seen since before WWII. Moreover, in many ways, the 2007-09 recession mirrored the Great Depression, with a financial crisis, unusually high unemployment, and plummeting prices for goods and services. Economists now refer to it as the Great Recession.
Since 1857, the average length of a recession has been less than 17.5 months. Since the days of the Buchanan administration, recessions have been shorter and less severe. The long-term average includes the 1873 recession, a kidney stone of a 65-month decline. It also includes the 43-month-long Great Depression.
Recessions have gotten less severe since World War II, lasting an average of 11.1 months. Part of this is because, thanks to the Federal Deposit Insurance Corporation, bank failures no longer result in the loss of your life savings, and the Federal Reserve has gotten (slightly) better at managing the country's money supply.
Again, since 1857, an average recession has happened every three and a quarter years. The government used to believe that letting recessions run their course was the best option for everyone involved.
Since World War II, we have gone between recessions an average of 58.4 months, or nearly five years. The previous economic upswing lasted 128 months, beginning at the end of the Great Recession. By that metric, we were overdue for an economic downturn when the Pandemic Recession struck.
An inverted yield curve has been a better forecast of economic downturns than the stock market, consumer confidence, or the index of leading economic indicators.
Just be aware that the inverted yield curve occasionally delivers a false signal.
The yield curve inverts when short-term government assets, such as the three-month Treasury bill, yield more than the 10-year Treasury bond. This suggests that bond dealers anticipate slower growth in the future. The US curve has inverted in the last 50 years before every recession, with only one false alarm.
Moreover, while it may be sending a false signal this time, it has worked consistently. It undoubtedly served its purpose during the Pandemic Recession.
In 2019 and early 2020, the yield curve reversed many times. The three-month T-bill yielded 1.13% on March 3, while the 10-year T-note yielded 1.1%. (To complicate matters, some economists prefer the two-year T-note yield rather than the three-month T-bill yield.)
The index of leading economic indicators is a composite of ten indicators, including the stock market and consumer confidence. It is beneficial for those seeking a more comprehensive picture of the economy.
