Everyone is interested in a glimpse into the future, wondering when the next recession will hit, but when it comes to recessions, you can learn a lot by looking at the past. Recessions have broad, sweeping effects on the economic/consumer climate. It’s important to note that recessions are part of the economic cycle: They are necessary as part of a cycle of expansion and contraction. If you’re prepared, a recession can present a planning opportunity.
The rule of thumb definition of a recession is two consecutive quarters of negative Gross Domestic Product (GDP) growth. This definition was coined in a 1974 New York Times article from the head of the Bureau of Labor Statistics, who also suggested several other measurements. The National Bureau of Economic Statistics (NBER) defines an economic recession as: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." NBER is the authority on recessions, especially when we look at when they started and when they ended.
Recession versus Depression. A Depression is an extended, severe recession that lasts longer (3-4 years) and includes a GDP decline of 10% or more. Most of our minds go immediately to the Great Depression of the 1930s as the worst economic contraction. To be sure, the Great Depression (which warrants capitalization) saw the GDP decline between 1929-1933 by 33% and unemployment soar to 25%. What most people don’t know is that the recession of 1920 was nearly as deep, and the descent much faster, which is why the Roaring 20s were roaring: they roared out of a big hole. We had a doozy of a depression in 1837 when the Bank of England raised interest rates, which set off a crisis in lending and the country sank into a prolonged depression that lasted until 1843. The California Gold Rush helped bring an end to the Great Depression of 1837 by boosting the US gold supply. The all-time award winner for depressions is the ‘General Crisis’ of 1640.’ During this stretch, wars, inflation, population declines, and revolts marked one of the most disruptive periods of history and included the temporary disappearance of the government of Poland and the fall of the Ming Dynasty.
Recession alphabets. Economists love letter metaphors, especially when it comes to recessions. They describe the contour of a recession and its recovery with a corresponding letter shape. We could have a V-shaped, W-shaped, U-shaped, or L-shaped recession. I’ll even suggest a J-shaped, which is definitely on my wish list.
A V-shaped recession obviously looks like a letter V and is recursive. GDP goes down and recovers at the same relative slope. The recession of 1990-91 was V-shaped. V-shaped recessions are like tossing a ball. If the ball bounces back up at a similar angle, there is symmetry. This is the type of recession we most commonly see.
A W-shaped recession is a double-dip or a recession with a temporary but failed recovery in the middle. Think of two Vs with a wee touch of hope in the middle. The recession of 1980-1982 was a double dip. Some of us can remember the inflation and interest rates of the 80s when the air traffic controllers were fired, and mortgage rates were above 10%.
A U-shaped recession happens when the economy goes down and stays down. The best example of this was the 1973-75 recession when inflation was running hot and oil prices spiked. I remember the gas lines. People with even number license plates able to buy gas on one day and odd numbered plates on another. I once ran out of gas in the gas line.
An L is ugly: it goes down and stays down. This is exemplified by the asset bubble in Japan during the 1990s, where the Japanese GDP dropped and stayed down. I find it ironic that the essay ‘The Japan that can say No: Why Japan Will Be First Among Equals’ was published in 1989, just as Japan GDP declined about 20% and real wages still remain below 1997 levels.
There could be other letters. I think if we can call Japan an L, we could call Australia a J. A J-shaped recession would be a case of a downturn that doesn’t just recover, it morphs into a period of growth. Australia has enjoyed a 27-year upswing. I’ll take the J style recession.
Recessions are bad…and good. We all dread recessions, but they have a silver lining. Let’s look at the negatives first. Recessions usually share certain characteristics:
- Business activity slows
- Unemployment goes up
- Capital expenditures go down
- Credit tightens
- Inflation goes down
- Short term interest rates go down
All these things sound bad, but think:
- If business is bad, our competition is weakened, hopefully, weaker than us
- If people are looking for work, employers can more easily find quality candidates
- If no one is buying, prices go down on our cap ex
- If credit gets tight, we can be glad we secured it before we needed it
- If inflation and rates go down, our money will go further, and we’ll be glad we have cash on hand
Recessions are opportunities. They will be painful, but they can have a very pleasant aftermath. Instead of hiding from the reality of recession, we might employ a bit of foresight and planning. We can work toward seizing the opportunities a recession presents. Just as surely as the economic cycle will present times of decline and contraction, growth will come again. Capitalizing on the opportunities presented during a recession will have us poised and ready when the upswing begins.