by: Richard A. Anderson
The U.S. economy is on the verge of breaking the record for the longest stretch of economic expansion in U.S. history. Since the U.S. economy hit bottom in June 2009 following the Great Recession, it has been on a slow and steady recovery that has it on the brink of surpassing the expansion from March 1991 to March 2001 as the longest in U.S. history.
The narrative has been that this is a bad thing. That the risk of a recession is higher now because lengthy periods of growth encourage risky behavior.
We are overdue for a recession is the story we keep hearing. Yet, the trend of longer economic expansions is not new.
Dating back to 1854, there have been 33 recessions. Those 33 recessions lasted an average of 17.5 months and the average time between recessions was 38.7 months.
But, if you break that long time period down into sub-periods, a trend starts to emerge.
From 1854 to 1919 there were 16 recessions that lasted an average of 21.6 months. The average time between recessions was 26.6 months.
From 1919 to 1945 there were 6 recessions that lasted an average of 18.2 months. The average time between recessions was 35.0 months.
From 1945 to 2009 there were 11 recessions that lasted an average of 11.1 months. The average time between recessions was 58.4 months.
According to this data, the trend has been shorter recessions and longer economic expansions. There are many different theories to explain this.
One is that our economy has transitioned from a manufacturing economy to a service economy. We are less prone to boom-or-bust economic growth that results in massive overproduction and hiring when the economy picks up and massive production cuts and layoffs when the economy slows down.
Another theory is we are now a more developed economy. We rely less on trade and other foreign economies for goods and services, which means the conditions outside our borders have less of an impact on our economy.
And finally, the Federal Reserve is better at managing the business cycle. In the past few decades, the Fed has been more transparent about its actions and has become more data-dependent when making decisions. This has improved its ability to manage the cyclical nature of the economy, or at least has improved its ability to extend the expansionary periods.
This reduction in the volatility of business cycles has come to be known as the Great Moderation. Recessions aren’t as drastic, and recoveries aren’t as strong.
No one knows when the next recession is going to happen, but what we do know is that recessions don’t just happen on their own. There has to be a catalyst. There is a lot of chatter about what that catalyst might be: a trade war with China, a Fed policy mistake, a slowing global economy, or rising corporate debt. One of these could certainly contribute to the start of the next recession, or it could be something we haven’t even thought of yet.
The bottom line is recessions are a normal part of a healthy economy. And the compensation we receive in terms of returns on our investment dollars is the reward for bearing the risk of the business cycle.