What’s A Recession?
In the 78 years since the end of World War II, this country has had 13 Economic Recessions, or an average of a recession every six years. Perhaps the strangest of all these downturns was when a President had a heart attack. The year was 1957, and the President was Dwight Eisenhower. The country was luxuriating in the years following the War when Eisenhower was stricken. A new technology, Television, was emerging, and the nation saw the Commander-in-Chief in his hospital room. We realized our leader’s vulnerability for the first time in the post-war era.
However, as is often the case, there was much more to this economic story than was first reported. However, this was immediately labeled the “Heart-attack” Recession. It turned out that the Federal Reserve had been hiking interest rates and tightening monetary conditions for two years. It was the Fed’s actions that more likely contributed to this decline.
Finding out what a Recession is is more challenging than it looks. As you search the internet, you’ll, no doubt, run into its definition as: “two consecutive quarters of negative economic growth.” And while that’s a good beginning, it is only part of the story. The definition of a recession is much like the definition of a strike in baseball. As many players will tell you, a strike is whatever the Umpire says. In the case of a Recession, the Umpire is the National Bureau of Economic Research, a not-for-profit organization in Washington, DC.
The NBER has been calling the economy’s balls and strikes since 1920. And like some baseball umpires, it has been known to make a questionable call now and then. For instance, it took the NBER over a year to call the end of the 2009 Recession and several months to name the COVID-19 drop, the most significant in the nation’s history, a “Recession.”
Each Recession is unique, with several different factors contributing to the downturn. However, they all have one thing in common: one event that inevitably kicks off the decline. And that single factor is the Federal Reserve’s monetary tightening. The Fed can be very effective when it wants to slow the economy. The attached chart makes it easy to see when the Fed begins the process because their favorite method of tightening monetary conditions is raising interest rates. So, as soon as they increase the Fed Funds Interest Rates, as they are now, you know that a Recession is on the clock.
The problem is we need to find out when the Recession will begin. In 1957 and 1972, a Recession started a little more than one year after raising rates. In 1970, the Fed had raised interest rates for eight long years before that Recession. On average, it takes about three years of higher interest rates before a Recession begins. Currently, we’re about halfway there.
Recessions are like benchmarks. Although they’re often not planned for, they present an excellent picture of the economy at any given time. For instance, from 1949 until 1970, the nation experienced five relatively minor recessions lasting less than a year, with a relatively rapid recovery. The economy was strong. It was a peak period for the United States, with dynamic economic growth and a well-educated, hard-working population. America was at the top of its game.
However, beginning in 1973, we faced three Recessions different from anything we had seen before. These new recessions lasted longer, caused more unemployment, and were more severe than their predecessors. Not since the Great Depression or World War II had we seen Recessions that were this dire.
The 1973 Recession showed our energy Achilles heel. It was the year of the OPEC Oil Embargo, and the result was a spike in inflation, with those higher overall costs resulting in a new phenomenon called “Stagflation.” This Recession resulted in 9% widespread unemployment and lasted 16 months, the most prolonged Recession since the Great Depression.
Unfortunately, this relatively new oil-driven inflation would last. Less than seven years later, a Revolution in Iran would again drive prices higher. Similarly, the Fed would raise interest rates, this time to astronomical heights, as the Fed Funds Rate reached 19% — this time, the unemployment rate hit 10.8%, and the Recession lasted for a year.
These two Recessions marked the first time that energy-driven inflation entered the economy.
1990, the country experienced a relatively mild recession, mainly due to the Fed’s efforts to curtail inflation. The longest peacetime economic expansion of the modern era followed.
However, in 2007 came the “Great Recession,” a recession centered almost entirely within the financial sector. What began as a “subprime” mortgage crisis. That is a crisis where many mortgage borrowers could not meet their monthly payments. The result was massive defaults across vast areas of mortgage-backed securities. Major financial institutions such as Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Brothers failed. Additionally, some money-centered banks were insolvent.
The GFC was the most significant financial crisis up to that time and needed a concerted effort by the Federal Government to extricate us. The GFC lasted for one and a half years, created 10% unemployment, and took a combined aid package of $1.4 trillion.
The final Recession of the modern era demands a separate category. It was the COVID-19 pandemic of 2020. The World Health Organization reports that 103 million people in the United States were infected, with 1.1 million deaths. There can be little doubt that this was a worldwide health emergency. It was also a most impactful economic event.
Two aspects of the Pandemic make it unique: its severity and speed. The American Economy went from full speed ahead to dead stop and back again in less than three months. It is the only Recession the NBER has ever identified lasting less than two quarters. The total lockdown for the Pandemic only lasted two months. At a 20% drop in GDP, this was the most rapid decline in the country’s economy…ever. The current estimate is that 15% of the country was thrown into unemployment, although that number is undoubtedly dramatically understated. Remember, all “non-essential” workers were required to “self-quarantine.”
Two Presidents, Trump and Biden, elected to send out $5 Trillion in Stimulus packages, more than double the aid package for the Great Recession, making this by far the most enormous recovery effort in history. From an economic perspective, the COVID-19 recession ought to be a lesson to us all: this economy could not survive another lockdown of that magnitude.
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Recessions give us an excellent benchmark from which to view our evolving economy. From the growing industrial powerhouse of the 1950s and 60s to the energy-challenged 1970s and the booming prosperity of the late 1980s and on to the 1990s. More recently, the Great Financial Crisis of last decade, to now COVID. The American economy is constantly changing and adapting. Recessions can measure our progress and our failures.
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