What we can learn from past recessions
We are living in an uncertain economic time, and with that uncertainty comes a lot of fear. But there’s no reason for us to panic right now. We can turn to what we’ve learned from past recessions.
We are living in an uncertain economic time, and with that uncertainty comes a lot of fear.
Fear is understandable at this time. We’ve spent the last two-plus years in a pandemic that required an acute response to fear and uncertainty.
But there’s no reason for us to panic right now. We can turn to what we’ve learned from past recessions.
This has happened before, but this time is different
The big difference between a potential recession today and past recessions is the COVID-19 pandemic. It’s hard to know if the resulting recession is just the normal course of a business cycle or if this is something else entirely.
We’ve been in an artificial Bull Market and knew this couldn’t last forever. The government was putting a lot of money into the economy over the past few years because of the pandemic with things like the Employee Retention Credit, PPP loans and added unemployment benefits. This was a good thing in the middle of the pandemic to help prop up the economy, but we’re seeing and feeling the results with inflation now reaching a 40-year high.
A Bear Market is defined as a sustained period of downward trending stock prices. They are often accompanied by an economic recession and high unemployment. Bear Markets are not entirely uncommon.
What could happen is that things would get worse before they get better and eventually stabilize. That is unfortunately a normal function of our economy. We’ve seen at least two financial recessions each decade since the 1970s.
It’s not shocking recessions occur. The U.S. has experienced 13 serious recessions in the past 75 years, and the average lasted for a period of about 11 months. What you typically expect to happen is:
The economy comes to a standstill
Unemployment starts to increase
Business owners make fewer sales
What makes this time unique is that this is an “inflation-based” recession, where inflation is high, but economic growth is slow. There are also low levels of unemployment and a 1:9 jobs-to-openings ratio.
Consumer spending is high and we have a healthy and strong labor force, which is atypical for any previous recession.
Since we are dealing with unprecedented circumstances, it’s hard for economists to predict exactly how bad a recession could be and how long it would last.
This is not like 2008
One silver lining to any threat of recession is that this is not the same as The Great Financial Crisis of 2008.
This article from Bloomberg lays out 10 ways this recession is very different, but here are a few key takeaways and main reasons why this is different from the last recession:
2008 was plagued with a shortage of money. The stress on the market these days is more related to supply chain issues. Suppliers are struggling to keep up with consumer demand. They were hit by pandemic-induced factory shutdowns, shipping delays, reduced production, etc.
Inflation is at an all-time high of 9.1%. This is not just in America either, it’s happening all over the world. In 2008, the inflation rate was around 3.84%. An inflationary recession has not occurred since the 1970s.
The economy will recover
Recessions and recoveries are different, but as mentioned earlier, they are not entirely uncommon.
The first lesson of any recession is that it is always followed by a recovery that includes a rebound in the stock market. And while that may not be much comfort right now as we near a recession, it’s important to keep in mind that this will not last.
A recession is never a fun topic, but it is something that we can be better prepared for by making sure we have these discussions and making sure that we’re aware of the lessons we’ve learned from recessions past.