Category Archives: recessions

18/3/20: Past Recessions and COVID19 Crisis


As governments around the world are revising the expected duration of the extraordinary restrictive measures aimed at containing COVID19 pandemic, it is worth looking back at the history of past recessions by duration:


The chart above clearly shows that U.S. recessions (generally historically shallower and less prolonged than those in Europe) have been lengthy in duration, with only two recessions lasting < 8 months and only six lasting less than 10 months. The 1918-1919 recession was preceded by the Spanish Flu epidemic, but the recovery from the recession was also supported by the end of the WW1. Some more on the Spanish Flu pandemic effects on the economy can be found here: https://www.stlouisfed.org/~/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf.

The 1918-1919 recession was not an isolated incident, as it was followed closely by the twin recession of 1920-1921. The joint episodes lasted 25 months. Similarly, the 1980 and 1981 twin recessions should also be treated as a joint episode of 22 months duration. Adjusting for these, average recession has been lasting 15 months, not 13 months, with only four recession of duration < 10 months.

Should, as now expected, the Covid2019 pandemic cause a global recession, it is unlikely to be short-lived, implying that any fiscal and monetary supports required to ameliorate the crisis core effects will have to be in place for much longer than the 2-3 months currently implied by the crisis contagion and social distancing restriction.

3/7/19: Record Recovery: Duration and Perceptions


While last month the ongoing 'recovery' has clocked the longest duration of all recoveries in the U.S. history (see chart 1 below), there is a continued and sustained perception of this recovery as being somehow weak.

And, in fairness, based on real GDP growth during the modern business cycles (next chart), current expansion is hardly impressive:

However, public perceptions should really be more closely following personal disposal income dynamics than the aggregate economic output growth. So here is a chart plotting evolution of the real disposable income per capita through business cycles:


By disposable income metrics, here is what matters:

  1. The Great Recession was horrific in terms of duration and depth of declines in personal disposable income.
  2. The recovery has been extremely volatile over the first 7 years.
  3. It took 22 quarters for personal disposable income to recover to the levels seen in the third quarter of the recovery.
So what matters to the public perception of the recovery in the current cycle is the long-lasting memory of the collapse, laced with the negative perceptions lingering from the early years of the recovery.

To confirm this, look at the average rate of recovery in the real disposable income per quarter of the recovery cycle. The next two charts plot this metric, relative to the (a) full business cycle - from the start of the recession to the end of the recovery (next chart) and (b) recovery cycle alone - from the trough of the recession to the end of the recovery (second chart below):




So looking at the trough-to-peak part of the cycle (the expansion part of the cycle) alone implies we are experiencing the best recovery on modern record. But looking at the start-of-recession-to-end-of-recovery cycle, the current recovery period has been less than spectacular, ranking fourth in strength overall.

Which is, of course, to say that our negative perceptions of the recovery are anchored to our experience of the crisis. We are, after all, behavioral animals, rather than rational agents.

4/2/16: Smal v Large Cap Stocks: Recession Cycle Performance


Credit Suisse did an interesting exercise recently in a note to clients. They took U.S. equities indices for large cap (S&P500) and small cap (Russell 2000) stocks and computed an average downside to each index across all U.S. recessions from 1980 on and then to the upside from the post-recession trough. The episodes averaged over are: 1980, 1981-1982, 1990-1991, 2001, and 2007-2009. As a caution, there is no survivorship bias (index composition risk) adjustment to the resulting data.

So per CS: “Measuring the average peak-to-trough performance of the Russell 2000 and S&P 500 from one year before the start of each recession to the end of the downturn, the bank found that large caps were more resilient than small caps across the five slumps: the S&P 500 fell by an average of 32 percent, while the Russell 2000 dropped 37 percent. But it was a different story on the way back up. The Russell 2000 averaged returns of 86 percent from the start of each recession to one year after its end, while the S&P 500 posted returns of just 51 percent.”

So over the part of the cycle covered by CS, Russell 2000 was up, net, 17 percent, while S&P was up, net, only 3%.