Getting to Know the Recession Boogieman

October 5th, 2009

I remember from grade 10 business class that recessions happen every seven years or so. Seeing as how I learnt this in such a rudimentary course, I’m always inititally surprised that such a fuss is made when the markets slow down. Did the veteran economic experts and seasoned financial reporters fail grade nine? I have to remind myself that they play an important role in the delicate balance of the economy. They keep the fear of boogieman alive.

The boogieman historically has been a formless creature of pure fear used to scare children into behaving. Now it’s been renamed “recession” and used to scare adults. Nobody really understands it since it’s never actually been given a concrete form, but everyone works hard to avoid being eaten by it.

In the interest of better understanding this boogieman for adults, I searched for succinct and sufficient information on recessions. Unsatisfied with my findings I assembled some information that might ease some minds and aid in making better financial decisions.

Recession’s Roles

Economic:
Like the shapeless boogieman, there is no set definition for a recession. It can be thought of as measure of investor optimism as much as any quantitative metric.

Common numeric measurements consider drops in employment rates, gross domestic product, or stock market prices. Some like using fancy methods like “inverted yield curves” to identify recessions.

Functionally it can be considered an overall sense of doom and gloom in the financial markets. In the meanwhile your portfolio doesn’t look great and you hear stories of people you know losing their jobs.

Psychological

Imagine you work for a company that has become uncompetitive, lazy, entitled, out-of-fashion, or otherwise complacent. As this company loses money, you might find yourself laid off, downtrodden, unable to make your mortgage payments, and possibly wearing an oak barrel.

Businesses motivate with sticks and carrots. Income is the carrot. Recession is the stick; the boogieman. It’s everything that can go wrong in life if you don’t show up on time for work, ready to build the best widgets out there.

Functional
The “recessions excuse” gives the powers that be an unwritten authorization to layoff staff without fear of wrongful termination suits. It’s like open season for unproductive employees or even entire divisions. Unfortunately, collateral damage affecting driven, productive employees is a frequent occurrence, although rarely a contestable one. “Sorry, times are tough,” goes the saying.

Seeing it Coming

So now that we know the roles recessions play, we can examine the patterns they follow. Let’s use the US economy as an example and look at the last 50 years:

Date	Description	Duration	Time since prior
December 2007 - ?	Subprime Mortgage Crisis/Financial Market Meltdown	Ongoing	6 years, 1 month
March 2001 - November 2001	Dot-Com Bubble Burst	8 months	10 years
July 1990 - March 1991	Savings and Loan Crisis (following “Black Monday”)	8 months	7 years, 8 months
July 1981 - November 1982	Financial Institutions Crises (Second of the “Double Dip” recessions)	16 months	1 year
January 1980 - July 1980	Financial Institutions Crises (First of the “Double Dip” recessions)	6 months	4 years, 10 months
November 1973 - March 1975	“The Great Inflation” (and the Oil Crisis)	16 months	3 years
December 1969 - November 1970	Early part of “The Great Inflation”	11 months	8 years, 10 months
April 1960- February 1961	Recession of 1960-1961	10 months	2 years

Source: National Bureau of Economic Research, US Business Cycle Expansions and Contractions.

This can be expressed visually on a timeline, with blue bands representing recessions:

Lessons Learnt

Duration: Recessions tended to last six to 16 months.

Cycles: The seven year cycle taught in high school seems to hold true on average, yet resurging economic crises are possible. When a resurgence of recession did occur, it typically did so a year after the prior recession finished.

Grain of Salt: Remember the past is no guarantee of the future. There’s no exact pattern for a recession.

Think long-term: The economy spends more time out of recessions than in them. Ride out the bad pockets and don’t panic.

Doom and gloom sell: In the interest of writing eye-catching headlines, recessions are given frightful names. This seems to have developed more in recent decades. The newer nicknames given to recessions are more specific, pointing blame at an individual source, as well as more dreadful-sounding (”Black Monday”, “Market Meltdown”). I could not find nicknames for older recessions, it seems they were just know as “the recession” at the time. So remember, shock journalism may keep the fear of the boogieman alive, but dramatic names are just that. Downturns in the economy are normal. They pass.

Recessions play many roles in many contexts. One of those roles is of motivation by fear; a tool of the economy to keep itself moving forward. The media keeps this boogieman alive with scary names and proclamations (”the worst financial crisis since the Great Depression” is a popular one). It becomes an opportunity for employers to make examples of poorly performing employees and even whole divisions. So in the face of so much synchronized doom and gloom, remember it’s all just a cycle. Know when to expect it, how to calmly ride it out, and never let your guard down.