Recessions, Part 3: The Aftermath

by cactus

Recessions, Part 3: The Aftermath
This post looks at the length & severity of a recession and compares those factors to the length & speed of the previous recession. Data on the length of the recession, in months, comes from the NBER, and data on real GDP per capita (the measure of growth and shrinkage used in this post) comes from the BEA. As noted in the second post in the series (link below), real GDP per capita data “is available annually from 1929 to 1946 and quarterly thereafter. I did no smoothing – that is to say… for an event that occurred in January, February, or March of 2001, as an example, I used figures for Q1 of 2001.”

With that, let’s go. Figure 1 below shows the annualized shrinkage during a recession v. the length of the following expansion (in months).

Figure 1.

No obvious relationship, right. But check out Figure 2, which shows the annualized shrinkage during a recession v. the speed of the following expansion.

Figure 2.

Well…. this seems a bit less unambiguous… in general, the faster the drop, the faster the growth that follows. In general.

Does that suggest rapid growth for us now, what with the Great Recession and all? Actually, no. On an annualized basis, the Great Recession produced only the seventh fastest decline among the 14 recessions that begin with the monster of 1929. What made the Great Recession so awful was its length – it was the longest downturn since the Great Depression. Interestingly, of the only two that were comparable in length – one came a few years after big decreases to the marginal tax rate (the recession that began in ’73) and one came the year big cuts to the marginal rate were announced (the recession that began in ’81). It would appear that the only big decrease in marginal tax rates that didn’t have a very lengthy recession hanging around them happened in 1964. Nobody is saying recessions are caused by tax cuts… but one wonders why tax cutting goodness isn’t a bit better at eliminating the problem.

But I digress… so back to the grind. The next graph shows the length of recessions v. the length of the following expansions.

Figure 3

Again… no clear relationship.

But, there seems a relationship between the length of a recession and the rate of growth during the subsequent recovery.

Figure 4

It seems that in general, longer recessions are associated with faster recoveries. And this does, hopefully, portend good things for the current expansion. No guarantee, of course, but we can all keep our fingers crossed.

Kind of as an aside, in the last post on this topic, reader K Harris asked whether any of this recession analysis can shed any light on the Great Moderation. And to be honest, I’m not sure. Assuming the GM began after the early 80s recession, and ran until the start of the most recent disaster, it was a period with two short, relatively mild recessions. During the expansions, growth was pretty good in stretches (pieces of the Reagan and Clinton administrations) and frankly, pretty lousy (most of the Bush and Bush administrations). I wonder whether perhaps the automatic stabilizers and Fed policy (Reagan and Bush 2 were the beneficiaries of some serious real M1 per capita growth) helped prevent periods in which there wasn’t much of an expansion from dipping into recessions. I dunno. Thoughts?


Previous posts in this series:
Part 1: Length, severity, and count of Recessions, by the Party of the President in office
Part 2: Length, severity of Recession v. Length and Speed of Previous Expansion