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  3. Recession Lessons: Looking Back, Looking Ahead

Recession Lessons: Looking Back, Looking Ahead

Submitted by Bernhardt Wealth Management on May 11th, 2020
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With gross domestic product (GDP) off 2.4% in the first quarter of 2020 and broad anticipation of perhaps ten times that figure in the second quarter, the U.S. economy already meets the textbook definition of a recession, according to a number of economists. A recession is usually identified as two consecutive periods of negative growth in the economy, and it appears we are well on track to meet that qualification, especially given the recent unemployment numbers: According to the U.S. Bureau of Labor Statistics (BLS) unemployment rose in April to 14.7% from just over 4% in March, the most rapid month-over-month increase since the BLS began keeping seasonally adjusted figures in 1948. Since consumer buying accounts for around 70% of GDP, the swelling ranks of unemployed do not bode well for U.S. productivity in the second quarter.

Because recessions can only be officially determined in retrospect, however, we won’t know for absolutely certain until the end of the second quarter whether the economists’ predictions hold true. But if we are in a recession right now because of the cataclysmic contraction imposed by the coronavirus pandemic, is there anything that past recessions can teach us?

Obviously, recessions are unpleasant. Layoffs cause reduced (or eliminated) income, industrial production drops off, and retail sales tumble as large segments of the population try to cope with unemployment and uncertainty. And in the current situation, the pandemic creates an additional level of malaise as many people remain worried about their health or that of their loved ones, even as the U.S. economy tries to restart.

In fact, this last point reveals one important lesson: No two recessions are the same. Each has different causes, different effects, and different means of resolution. The “stagflation” of the 1970s was not the same as the Dotcom Bubble of the early 2000s; both of those events were different than the Great Recession of 2008-09.

And this brings us to another important lesson about recessions: they typically don’t last as long as the expansions that precede and follow them. The following chart illustrates the U.S. business cycle from 1950 to the end of 2019.

As the chart illustrates, “official” recessions over the past 69 years have averaged 11 months in duration, accounting for about 15% of the months included in this chart. The average recession (the small red areas below the 0% line) resulted in cumulative negative GDP of around 1.8%. Expansions (the purple triangles) have averaged 67 months in duration and contributed an average cumulative increase in GDP of around 24.3%. Over this period, the U.S. economy was in expansion mode about 85% of the time.

Interestingly, the panel of economists referred to at the beginning of this article expect the current recession—assuming we are in one—to be relatively brief. In fact, they anticipate that the economy will bounce back in the second half of the year and even manage positive growth of around 6% by the end of the year. This accords with recent comments by Fed Vice Chair Richard Clarida, who says that while additional policy and fiscal support may be needed from the central bank, the economy could rebound in the third quarter.

Of course, a final lesson in recessions is that they recur. In fact, they are a part of the normal business cycle. This means that even when we have a vaccine to prevent COVID-19, at some point in the future there will be another black swan event or economic emergency that precipitates another recession.

Perhaps the ultimate takeaway for investors is that the necessarily up-and-down pattern of the business cycle dictates the importance of a well-diversified portfolio and access to solid, professional investing advice. We work with our clients through recessions and expansions, through rising and falling interest rates, and through bull markets and bear markets. Our goal is to provide the best and most scientifically valid data, followed by time-tested investment principles designed to help our clients thrive over the long term. If you are looking for help like that, please let us know.

Buen Camino!

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