Recessions – “What’s in a Name”

Shakespeare once alluded to the fact that names are sometimes irrelevant and arbitrary in his play “Romeo and Juliet”.

While a rose by any other name would still smell as sweet, the economy sometimes can be far less rosy, and economists have long struggled with how to precisely define this type of circumstance.

Recessions in the United States are declared by the National Bureau of Economic Research (NBER) when there is a marked drop in economic activity across various factors. Since World War II, the US has faced 12 different recessions all coming about between 5 – 10 years after each other. This data indicates that recessions are cyclical, but this idea has been challenged by many economists. By analyzing the patterns and instigators of a recession, a lot can be learned about the economy.

First, it is necessary to understand the meaning of a recession. The simple definition of a recession is when the economy turns bad. But what does that really tell us? Recessions are declared by experts when certain economical statistics such as Gross Domestic Product (GDP), Inflation Rates, Interest Rates, Unemployment Rates, and Consumer Prices portray declining economic growth for several consecutive months.

Economic Indicators

Because these statistics are used to declare recessions, they can also be used to predict when a recession is to occur. Economists and anyone in the financial industry are always trying to predict recessions because this knowledge opens countless opportunities to capitalize on a recessing market. For example, by investing in counter-cyclical stocks such as alcohol brands, discount retailers, or utility companies, investors can still profit while the economy heads into turmoil. Now getting back on topic, the major leading recession indicators are currently yield curves, Consumer Confidence Index, and the previously mentioned statistics.

**Figure 1**: Current Normal Yield Curve as it slopes to the right in comparison to 2021 and 2020 (Guru Focus).

Yield curves have been making a lot more appearances in today’s world through news outlets and financial reports, making them the leading recession predictor. As seen in Figure 1, bond maturity dates are on the x-axis, while the treasury yield % or return on investment is on the y-axis. Since the short-term bond interest rates are set by the US Federal government and long-term bonds’ are determined by the market, the yield curve is an influential economic indicator. If the curve is a normal yield curve and slopes up to the right, investors believe that interest rates will be higher in the future. This indicates that the economy will be growing as interest rates are raised to moderate inflation and high inflation represents an economy with a lot of consumer spending and investment. Furthermore, if the yield curve is inverted (sloping downwards), investors believe that the markets will experience a decline as interest rates decrease. Because of how intertwined investor sentiment is with the yield curve, it has proved a credible indicator of recession for a few decades.

Currently, the US is seeing a normal yield curve indicating economic expansion as of April 2022. However, why is the Bank of America and many other forecasters signaling a recession?

The next recession indicator that is important to look at when understanding how economists try and predict a recession is the Consumer Confidence Index (CCI). The CCI is a survey that is administered by The Conference Board, a non-profit business research group. The results are posted on the last Tuesday of every month, which although isn’t as current as the US treasury yield curve, is still relatively faster paced than other economic indicators such as GDP. The survey consists of five questions about investor sentiment – positive responses result in a higher index while negative and neutral responses lower the index. The CCI measures investor optimism or pessimism about their current financial situation.

**Figure 2:** Consumer Confidence Index in the US showing a decline heading into August 2022 (The Conference Board)

**Figure 3:** Present Situation and Expectations Index in the US shows a significant disparity between consumer sentiment with regard to the current financial situation in the US and expectations for the future (The Conference Board).

In Figure 2, it can be seen that consumer confidence has been decreasing since the end of 2021 and into 2022. According to The Conference Board, consumer confidence in the current financial situation is relatively high as seen in Figure 2. However, the disparity between consumer expectations and current confidence is too large to ignore. This pessimism is a bad sign for the US financial situation and is an indicator of recession.

After looking at the US treasury yield curve and The Conference Board survey results, a conclusion about recession cannot be made. However, a flaw can be seen with regards to the Yield Curve as it relates high future interest rates to economic growth. On the other hand, it doesn’t account for the fact that higher interest rates, which reflect inflation, instill fear into the financial markets and investors. Because of recent rises in both inflation and the resulting interest rates, the CCI is indicating a recession.

Now of course we can’t just stop our analysis after concurring with two opposing recession indicators. A quick look at unemployment rates counter any chance of recession as US unemployment has hit a near record low over the last two decades at 3.6%. This extremely low unemployment rate is a huge effect of an increase in jobs in leisure and hospitality, professional and business services, retail trade, and manufacturing (U.S. Bureau of Labor Statistics). Furthermore, another economic indicator: nonfarm payroll employment is shown to have increased over the last several months. This also suggests economic expansion instead of a recession.

Although GDP is set to release in around two weeks, the current forecasts by The Conference Board stipulate a slowdown in real GDP growth. This leads to one of the most talked about economic indicators right now, inflation. The slowdown in real GDP growth is largely a direct correlation to the recent hikes in inflation as real GDP accounts for inflation rates.

From looking at all these economic and potential recession indicators, a safe judgment with respect to a coming recession cannot be made as most indicators show solely the economic growth that the US is currently experiencing. Right now the only indicator pointing towards a recession is the CCI and the pessimism in consumer expectations. Nevertheless, the trending topic right now, inflation and the resulting interest rate changes, is going to make us backtrack.

**Figure 4:** Current US Inflation Rate has seen tremendous increases over the past month as it rises from 8.6% – 9.1%. (U.S. Bureau of Labor Statistics).

As seen in Figure 4, the US inflation rate has risen significantly, not only this last month but for the past year. This rise in inflation is due to multiple factors, but the recent increase is due to the Russian-Ukraine war. It is important to note this global event has had numerous effects on the US economy. The main effect is the consequent increase in gas prices of over 150%. Before this increase, gas prices had already increased around 45% due to pent-up demand after the pandemic when everyone was inside and not traveling. The Russian Federation, which has been the aggressor in the war, is a major exporter of oil. Due to this, when Biden banned Russian oil, gas prices shot up as expected.

The hike in gas prices has affected the inflation rate greatly, but by looking at the Consumer Price Index (CPI), it can be seen that the increase in the prices of food and other items is on par with the inflation rate showing that the inflation numbers being broadcasted as a result of the increase in gas prices are not over exaggerated.

Overall, by looking at all these indicators, economists are able to make well-educated guesses about whether the economy will enter recession in the near future or not. However, after synthesizing the information presented by these indicators in the past few months, the future of our economy remains uncertain as the indicators often contradict one another. Furthermore, this is what makes these times in our economy filled with volatility because there is enough evidence to support all sides of the argument about whether there will be a recession or not.

Recessions – Cyclical?

Recessions are part of the business cycle that has been an integral part of our markets for many years now. The cycle is a result of the alternating economic state of expansion, peak, recession, and trough. Although each part of the cycle can last for different amounts of years, the stages are generally the same throughout our history. What causes this cycle you may ask?

The change and variability in all the previously mentioned economic indicators is one major cause of the cyclical nature of our markets. A specific key understanding with regards to economic indicators and this business cycle is inflation. As inflation rises, consumer spending increases because the price of everyday goods increases. Therefore, the labor markets adjust and workers are paid more, which then causes even more consumer spending and the cycle results in even higher inflation rates. As seen in the US, the recent increase in inflation rate discussed is also a reason for economists to believe that recession is coming because the inflation indicates large amounts of expansion, which means a peak should be due up for the US market.

According to the business cycle of our markets, after the peak comes recession, which is something to note when regarding economist theories on the potential of a near-future recession.

Another very important aspect to look at when discussing whether recessions are cyclical are the history of recessions in the US. Typically recessions have been found to occur every 5 – 10 years for between 6 months and 2 years.

By looking at Figure 5, it can be seen that although the average duration of a recession in the US is similar to what was said before, it is very inconsistent from year to year. Furthermore, the GDP contraction from each recession and the time in between each recession is extremely varied. From a brief analysis, it can be seen that recessions have been far worse pre-World War II as GDP contraction averaged greater than 22% during recessions in the past. Although milder now, recessions are still occurring with similar frequency. From these data points, it can definitely be seen that recessions do not seem to occur in a perfect cycle as there are gaps between recessions that range from a year to over 5 years. Thus, we as learning economists should not cop out and just say that recessions are cyclical, but instead an

**Figure 5:** History of Recessions in the US (NBER).

Recession	Causes
1853 – 54	“Free Banking Era” – Rising Interest Rates —> Dip in Railroad investments
1857 – 58	Decline in the purchase of Agricultural products by Europe Inflating railroad stock bubble, drop in the stock market, and folding of Ohio Life Insurance and Trust Company
1860 – 61	Right before Civil War – confederate notes —> currency issues (cost, supply)
1865 – 67	Sharecropping, Southern banks suffered after Civil War Cotton at all-time high —> Easy credit advancements
1869 – 70	Financing Civil War Reconstruction, Gold Panic—> Decrease in price of gold Lack of Consumerism and Businesses not stockpiling
1873 – 79	Largest Bank (Jay Cooke & Company) folded – overextension in construction Great Railroad Strike of 1877, disrupted the balance of currency cost and supply “Great Depression” before the one occurring in the 1930s
1882 – 85	Failures of Marine National Bank and brokerage firm Grant and Ward Decline in Railway industry
1887 – 88	Continued decline in railway industry Advancements in oil, steel, and communications made it short-lived
1890 – 91	Near collapse of Barings Bank in London due to risky Argentina investment —> global distrust in other large banks including Rothschilds
1893 – 94, 1895 – 97, 1902 – 04	Overextension of credit for railroads Decreases in stock costs, price of wheat, and many bank closures Silver reserves dropped as Free Silver campaign of Democrat William Jennings Bryan wanted to drop the gold standard – Defeated Fight over control of Northern Pacific railway —> Northern Securities Comp. Assassination of President William McKinley
1907 – 08	Knickerbocker Trust fund determined insolvent —> Decrease in trust Failed hostile takeover of United Copper, ended with Fed Reserve System
1910 – 12, 1913 – 14	Fallout from Sherman Antitrust Act —> Standard Oil dissolved Country recovered due to good harvest and poor harvests in Europe First Balkan War in 1912 – set the stage for WW1 and strained the global economy
1918 – 19	Post-WW1 surge in unemployment from returning soldiers and the Influenza pandemic of 1918 (675,000 Americans killed)
1920 – 21	Federal Budget cuts to pay off war debts—> Most deflationary year in the US
1923 – 24	Industrial Expansion declined during the Roaring 20s
1926 – 27	Henry Ford stopped sales of Model T and laid off 60,000 workers. Factories converted to produce Model A —> Financial stabilization in 1927
1929 – 33 (Great Depression)	Stock Market Crash of 1929, dependence on the gold standard, droughts in the southeast, and increased tariffs —> high unemployment which never fully recovered until after WWII, but partial recovery due to New Deal
1937 – 38	Cuts in federal spending to balance the budget, decreased production, stock market volatility, and gold sterilization. Production increase prior to WWII led to partial recovery
1945	Significant decrease in government spending after WWII
1948 – 49	Unemployment doubled as soldiers returned from WWII. Truman’s fair deal (Increased minimum wage, social security) and increased government spending (Korean War) helped relieve the economy
1953 – 54	A sharp decline in government spending due to the end of the Korean War and high interest rates
1957 – 58	Significant decrease in automobile sales, high interest rates Asian Flu (70,000 US deaths) —> GDP slowdown
1960 – 61	Fed tightened monetary policy to curb inflation
1969 – 70	A push to balance the budget deficit from the Vietnam War Fed tightened monetary policy to curb inflation again
1973 – 75, 1980, 1981 – 82	OPEC banned oil exports to the US —> price of oil quadrupled and inflation doubled, unemployment increased —> Stock market crash of 73 -74 Federal Reserve increased rates due to stagflation Declines in the auto and construction industry increased unemployment Strict monetary policies to reduce inflation again led to sharp increases in unemployment in the auto and construction industries
1990 – 91	Savings and loan crisis, increase in oil prices from Iraq invasion of Kuwait Gulf War helped stabilize oil prices
2001	Crash of the dotcom industry following the Y2K scare (fear that computers would stop working) Events on 9/11 inflicted fear among all people in the US of terrorism
2007 – 09 (Great Recession)	Subprime mortgage lending of banks to people with poor credit. Longest economic downturn since the Great Depression Many stimulus packages, interest rates set to 0, and billions in financial aid
2020	COVID-19 global pandemic —> social distancing and quarantining forcing many businesses out of business

From a brief view of the causes behind every recession in the US since the 1850s, what first jumps out is that most of the causes are of historical backgrounds. For example, almost every war and pandemic that hit the US greatly affected the economy and resulted in a recession.

Furthermore, many other factors such as collapses in banks in other countries, changing policies of major foreign economic giants such as OPEC, and terrorist attacks such as 9/11 have caused recessions throughout US history.

The most important conclusion to take away from this is that US recessions have almost always been inflicted by uncontrollable events that occur sporadically and cannot be calculated because it relies on knowing the decisions of everyone in the world. A single man, group, or country can decide to start global chaos, and therefore, there is no way to determine when this will occur.

By not knowing when global wars, pandemics, struggles, or even internal banking scandals will occur, economists should look at recessions as a part of the economy, but not as cyclical. Although it may seem that recessions have been cyclical, in actuality, there has been volatility in events that affected the US markets.

So What’s in a Name? Figuring out whether a recession is happening in real-time is hard — economists often disagree. Whether economists declare a recession or not, it is important to be a critical thinker and weigh all the indicators of economic decline in order to make the best financial decisions for ourselves and the people of America.