3 Things to Know About Recessions
Economist Marc Faber appeared on CNBC last month declaring that the odds of a new recession are 100%. As far as I can tell, he didn't attach a time frame to that prediction, so he's absolutely right. We will have more recessions. Count on it.
But when? That's the important question, and it's one nobody knows the answer to. Always remember the old Arabic saying: "Those who claim to foresee the future are lying, even if by chance they are later proved right."
So while we wait, here are three things to know about recessions.
1. We're having fewer of them
In May, Herman Cain wrote an op-ed in TheWall Street Journal arguing for a gold standard. Among his arguments: Under previous monetary standards, recessions were "less frequent" than in recent times.
I'm not sure what evidence he used to back that up (it may exist), but the official tracking of recessions by the National Bureau of Economic Research makes one thing clear: We've had far fewer recessions in recent decades than we did during the late 19th and early 20th century.
From 1860 to 1900, the economy was in recession 48% of the time. From 1900 to 1940, it was in recession 43% of the time. From 1940 to 1980, that plunged to 15%. And since 1980, we've been in recession about 16% of the time. Blogger Evan Soltas looked at similar data and wrote: "To put that in perspective, postwar America gets four additional years, on average, of real growth before a recession than did the America of history."
2. They have been more drawn out
We may be having fewer recessions, but recent downturns -- particularly the last three -- have been agonizingly slow to recover from. This chart, from the financial blog Calculated Risk, tells the story:
From the end of World War II through the 1980s, almost every recession saw employment return to its previous peak within two years. That trend ended in 1990 when employment took nearly three years to return to normal. In 2001, it took even longer -- four years. Today, almost five years after employment peaked, we're not quite halfway back to par. As I've written before, the most recent recession will likely surpass the Great Depression in duration when measured in employment terms.
Why recent recoveries are so painfully slow is the topic of lots of debate and little agreement. One idea is that innovation happens faster today than in previous generations, so laid-off workers often have to learn an entirely new skill set before regaining employment -- which is difficult, if not impossible, for many. Another is that unemployment benefits are more generous in recent times than they were during past recessions. And the three most recent recessions were all driven by the collapse of asset bubbles, which may inflict longer-lasting damage on confidence than run-of-the-mill slowdowns.
3. The last recession was much different from most
Most recoveries over the last half-century have been fueled by consumer spending, often financed with debt. The last recession was different. For the first time in recent history, real household debt declined:
This "deleveraging" process is healthy and necessary, but it's the biggest reason our recovery has been so slow. And the slower the recovery, the more people worry. The more people worry, the more likely it is we'll slip back into another recession. What's necessary for the long run can create a vicious cycle in the short run.
Maybe it will even cause more frequent recessions.
The article 3 Things to Know About Recessions originally appeared on Fool.com.Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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