From 1836-1928 the U.S. averaged a recession every 2.1 years. This included seven depressions (they were actually called panics back then) that led to an average contraction of 29% in business activity. Part of this had to do with the fact that the U.S. was on the gold standard at the time, but it’s also true that the U.S. was once an emerging market.
Following the Great Depression, the U.S. hasn’t experienced that type of business contraction since. Although it was the worst recession in the post-WWII period, even the Great Recession was relatively mild compared to the panics and depressions from the 19th and early 20th centuries.
Recessions don’t necessarily follow a set schedule, but you can be sure that the business cycle will rear its ugly head eventually. And just like stock bear markets, most investors will be shocked every time the next downturn hits.
I caught the highlights of the Daytona 500 last week on SportsCenter and the analysts said the drivers make somewhere between 5-8 pit stops over the course of the 200 laps in the 500 mile race. I thought that pit stops were an apt analogy here. NASCAR drivers can’t push their cars to the extreme for the duration of the race without taking a break. They need to stop and fill up their gas tanks, change their tires and make other adjustments.
Economies need recessions to take a breather every few years, as well. Growth can’t continue uninterrupted forever. Although they’re painful, recessions are needed to weed out the strong companies from the weak, as many companies go out of business during the downturns and new ones emerge.
The current recovery has been fairly slow so it’s likely the expansion still has a few years left to run. It’s possible we won’t see another recession until somewhere in the 2017-2020 time frame. That would put the current recovery in the eight to eleven year duration. With the Great Recession in our recent memory, many are concerned that every future recession will be a similar calamity. That’s highly unlikely as future cycles are never quite the same as past cycles.
One of the things I find most interesting about the prospect of the next recession is the question of the Fed’s policy toolkit when it finally does happen. Will we go into the next recession with loose monetary policies still in place?
As the chart illustrates, the US economy has lost at least one “engine”, which doesn´t allow it to climb back to “cruising height”, remaining “depressed”. If there´s another “engine failure”, it will become clear that the Fed will have to change the “fuel” it uses to make the plane fly at an adequate height and speed!