Practical analysis for investment professionals
20 December 2018

The Changing Nature of Recessions

We may not have seen the end of boom and bust — as former UK prime minister Gordon Brown once claimed — but the world’s leading economies do appear to have become more stable in recent decades.

This observation doesn’t mean the next recession (which we define as two or more consecutive quarters of economic contraction) is guaranteed to be mild. But analysis of the key components of the US economy suggests that the downturn — when it comes — is likely to be less severe than in the past. On the flipside, our research also suggests that the eventual recovery will be less robust.

Our analysis begins with a look back at the anatomy of US recessions since 1948. We chose to examine the US economy partly because of better data quality (this period covers 11 recessions) and partly because US downturns have often sparked economic weakness overseas. However, our analysis has also found that trends highlighted in the United States appear to be relevant in major developed economies around the world.

Towards a Smoother Economy

The US economy has gradually stabilized over the last 70 years. Growth has slowed considerably, but recessions have generally become milder — and recoveries weaker. And because the drop in economic volatility has broadly outweighed the slowdown in growth, recessions have occurred less frequently over time.

This economic stabilization appears to be primarily due to better inventory management by US corporations, and less disruption from big swings in government spending or volatility in the housing market. The services sector, which is more stable than manufacturing, has also become a much larger part of the US economy since the end of World War II.

However, just as downside risks to the US economy have been muted, the tools to stimulate growth have been blunted in recent years. In particular, the scope for fiscal and monetary policy to drive sharp V-shaped recoveries has faded.

Less-Frequent, Shallower Downturns and Weaker Recoveries

So when do we think that the next recession is most likely to start? Our simulations, based on the most recent 20 years of US data, suggest that the probability of a recession starting in the United States won’t exceed 50% until the third quarter of 2022 — this is two quarters later than would have been expected based on the experience of the previous 50 years. Investors today can therefore reasonably expect to enjoy a few extra quarters of growth compared to investors in the past.


Forecasting the Economic Cycle

Forecasting the Economic Cycle


Investors can also expect future downturns to be less severe, and for recoveries to be weaker. On average, the US economy has contracted 1.9% in real terms during the 11 post-war recessions and grown by 13.9% in the three years after each recession ended.

In contrast, based on the economic behavior of the last 20 years, a hypothetical future recession could involve a smaller 1.4% decline from peak to trough, but the economy may only be expected to grow 7% in the first three years of recovery.

The Implications for Investors

Rather than allowing investors to time the next downturn, our analysis is designed to help them recognize where the risks reside and consider how they might evolve.

For example, ever-more inventive monetary policy may be needed to support shallower recoveries, which means that over the next decade interest rates may be lower than would have been otherwise expected. Market volatility also could still be as violent as in the past — particularly if a more stable economic environment means that imbalances and asset bubbles have more time to build up.

Overall, however, while investors will find economic growth trending slower than it has historically, they should take some comfort in a global economy that is likely to be a bit steadier.

Dr. David Kelly, CFA, will be presenting at the CFA Institute Wealth Management 2019 Conference, which will be held 2–3 April 2019 in Fort Lauderdale, Florida.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/guirong hao

About the Author(s)
Dr. David Kelly, CFA

Dr. David Kelly, CFA, is chief global strategist and head of global market insights strategy at J.P. Morgan Asset Management.

7 thoughts on “The Changing Nature of Recessions”

  1. Morteza Zijerdi, CFA says:

    I appreciate you sharing source of this research as “Downturn will be less sever than in the past” fails the sniff test based on ‘01 and ‘08. Further with current level of national debt, a recession can turn into a currency crisis if it occurs — making it a catastrophic one.

    As we can see, markets are over-reacting to any signs of recession based on the magnitude of loss more than probability of occurrence. Concerns for slow recoveries may also translate into more severe recessions.

    I have discussed this in more detail in my recent article: https://www.linkedin.com/pulse/recession-2019-morteza-zijerdi-mba-cfa-cpa

    I appreciate you sharing your thoughts on this.

  2. Sandy Leopold says:

    I am flabbergasted by the certainty of his conclusions. 2007-2009 was most likely the worst recession since the 1930s and 2001 can hardly be considered a slight recession.

    Most of the rest of the world has not recovered from 2008. 2019 does not appear to be a good one for either Europe or Asia. While the US may not have a recession in 2019, the slowing of our economy coupled with the lack of available monetary and fiscal tools would indicate to me that when we have the next recession it is likely to be substantial or long and probably both.

    1. Kimberley says:

      EXACTLY what I thought!!

  3. Tony Frank says:

    Typical wall street advice.

  4. Gregory Sommer CFA says:

    I’m a little surprised at the casual analysis from someone so high up at JPM. Ned Davis research global recession probability is over 70%, the corporate spread is inverted, government curve is flat, & major spending items like housing & autos are declining. 2022 is more likely to be when we are coming out of recession.

  5. Truth says:

    Debt. That’s the reason for the illusion of stability. Take away the Trillions in spending since 2009 and then tell what the economy looks like.

  6. Dan Hassey says:

    Other main reasons for slow recoveries now and going forward:

    1. Law of large numbers. The last time the economy grew above a 4% average was 1982 to 1990 . In 1990, the economy was about $6 trillion today it’s about $20 trillion. It would be hard for a $20 trillion economy to grow consistently at 4%.

    2. Baby boomers are retiring en masse and this impacts spending, government deficits, debt, productivity and is and will be a drag on the economy.

    3. Millennials have too much debt and will not spend similar to past generations. Many entered the job market during the Great Recession. Just as the Great Depression impacted that generation’s view of stability and money, the impact of the Great Recession will impact in the same way Millennials.

    4. Much of our economy is no longer a free market. Most industries (energy, retail department stores, banks, pharma, defense, Wall Street firms….) are dominated by a few companies that reduces competition, places to work, productivity, innovation, growth. Our economy is more of an oligarchy.

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