Economic Recoveries 101
- Joshua M Brown
- October 3rd, 2012
There's a lot of concern out there about the next recession - and yes, I promise it's coming.
The next recession is always coming, regardless of how badly the Federal Reserve wants to nullify the business cycle and pretend it doesn't exist. The question is not if but when. Some bearish strategists say we're already in it in all but name. Some bullish strategists would say that we're on the cusp of the return of real economic growth, any day now, and that ISM numbers or car sales or home starts are somehow presaging this.
And then there are the realists (a group to which I hope I belong) who would say that we are not in a recession yet but we might as well be.
Based on the most important measures (employment, confidence, wage growth) it feels like a recession for the most part anyway and people are behaving as though we're in one. You'll forgive the barely employed father of three in the rust belt for not clicking his heels about this month's fucking beige book readings. We're at a rate of economic growth just above stall speed and the risk of tipping into a recession is ever-present at all times so long as we remain in this state.
Further, we've never been able to truly decouple from a synchronized slowdown with Europe - short-term decouplings always lead to an eventual recoupling, thanks to the incontrovertible truth of our export dependence. And because we know that Europe is now in a continent-wide recession, possibily headed toward a depression, it's not a stretch to say that we'll be joining them soon enough.
The reason why this matters is that the typical recession involves a 25 to 30% pullback for the stock market.
But as for the timing of the next recession, don't ask me. I can only provide you with the historical lengths of prior economic recovery periods, I'll let you conclude what this recovery period will ultimately finish up at. Some key things you need to know:
1. The first thing you have to be aware of is that this recovery officially dates back to the end of the last recession, pegged at July 2009 by NBER (the body that officially calculates this things).
2. That makes this particular recovery, pathetic though it may be, 38 months old already.
3. There have been ten other economic recoveries following recessions since World War II prior to this one.
4. The shortest recovery period (also called an expansion) was 24 months long, from April of 1958 to April of 1960.
5. The longest expansion in the post-war period was 120 months, from March 1991 to March 2001.
6. The average economic expansion during this period has been 63 months, or roughly five years, in length.
7. Our current expansion of just over 3 years is roughly two thirds of the way to that average length.
8. The best jobs growth we've seen in an economic recovery took place during the 1982-1990 period, when employment jumped by 24%.
9. The worst jobs growth in an economic recovery was recorded during the last one, 2001-2007, which was an anemic 6%.
10. The good news is that the average post-World War II recession has spanned just 11 months in length, hence we are in recession less than 20% of the amount of time than we are in recovery or expansion.
So, having this knowledge as the backdrop, feel free to ponder the question of how much longer this recovery should/might last.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.