Tuesday, February 7, 2023
Recession Lengths Vary Widely
Recessions occur when the economy has reached a peak in economic activity and it is heading toward the subsequent trough. The economy is back in expansion mode after the trough. Although it sounds obvious, investors should remember the economy is mostly in expansion—recessions are not the norm.
Since 1945, as illustrated in the table below, the average length of a recession is roughly 10 months. Depending on the cause of recession, lengths vary widely. The most recent recession was initiated by the government’s desire to squelch the transmission of COVID-19. As authorities shuttered businesses and told consumers to “shelter in place,” the economy came to a virtual standstill. But the recession did not last long. Just two months later, the economy resumed growth after experiencing the shortest recession on record.
In contrast to the most recent recession, the Great Financial Crisis was a recession caused by fundamental flaws in credit markets and pushed the economy into a decline that did not end until 18 months later.
Short and Shallow?
A potential recession this year will likely be shorter than the post-war average because consumers appear to be on better footing with access to a hot labor market and still holding onto a large amount of cash. Unemployment rates are at historic lows, job openings are still very high, and checkable deposits and money market accounts are flush with cash. Of course, these statements are made in the aggregate and do not account for the immense economic challenges felt by lower income households during this period of stubbornly high inflation.
The likelihood of a recession this year is not due to fundamental flaws in the credit markets, nor are we forecasting a resurgence of a global pandemic. Rather, we think the risk of a recession in 2023 is due to a pullback in consumer spending as households become more timid about economic uncertainty. Due to these reasons, a potential recession in 2023 will likely be short and shallow.
Conclusion: What Does This Mean for You?
Higher risks of a recession push businesses into cost-cutting mode. According to the past 12 months of layoff announcements, businesses are thinning payrolls because of cost-cutting and a downturn in demand. Business capital spending on items such as computers, machinery, and other business equipment often slows during the beginning of a recession. Shipments of capital goods, excluding aircraft, declined in November and December and that trend will likely continue as recession risks increase.
Investors should know that in the past several business cycles, equity markets (S&P 500) often fall before a recession officially starts and begin to recover before the recession ends. So if the economy ends up falling into a shorter-than-average recession during the first part of this year, investors will likely be rewarded by the end of the year for taking on risk in their portfolios.
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