Recessions

Now that some of the major Wall Street firms are predicting we have entered into a recession, I thought I would take a closer look at recessions. Per Wikipedia, a recession is defined as ”a decline in any country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.”

In the U.S., the National Bureau of Economic Research(NBER) officially dates the recessions. Here is their definition: A recession is 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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

The NBER typically declares that a recession has started 6 to 18 months after the beginning of a recession. At the time, it is often tough to tell if the economy has tipped into a recession. We won’t see the advance GDP numbers for 4th quarter 2007, until January 30, 2008. The numbers for January through March wont be announced until the end of April.

Calculated Risk had dug up these classic quotes on the 1990 recession.

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.” Greenspan, August 1990

“... the economy has not yet slipped into recession.” Greenspan, October 1990

The recession was declared by the NBER to have started in July 1990. By October 1990, the S & P 500 was close to the bottom. By the time it was obvious we were in a recession, the bottom had already been reached.

Despite the inherit murkiness of recessions, I will take the liberty of creating these graphs with the clarity of hindsight vision. You can click on the graphs for a larger view.

>We have had 10 recessions going back to 1948. The average recession has lasted 10.4 months. The average return on the S & P 500 from the start of the recession to the end of the recession has been -0.57%. In 6 out of the 10 recessions, the S & P 500 was higher at the end of the recession rather than the beginning of the recession. However, during the last 10 recessions, the S & P 500 did decline 13.6% from the beginning of the recession to the low reached during the recession. Note that the S & P 500 figures do not reflect the highs and lows that the S & P 500 traded at on a daily basis during the month; my figures just reflect the closing price for the month. The low was reached on average 6.8 months after the start of the recession. From the low during the recession to the subsequent high, the S & P 500 has gained an average of 35.1%.
There have been 3 instances of what I have termed false bottoms in the first or second month of a recession. In the last 10 recessioins ,there was never a real bottom that early. There have been 2 recessions in the last 10 years where the low was reached at the third month, the rest have been later. This is partly due to the fact that recessions are normally thought of as lasting at least 2 quarters. If the economy recovers in a few months (bottom is reached in the first or second month), then the period most likely would not be defined as a recession.

Finally, for a different perspective, I am also including the charts for the Great Depression, the recessions of 1937 and 1945, and finally the most sobering of all: the Japanese bubble.

I plan to revisit this topic from time to time.

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