3 Things to Know About Recessions

Economist Marc Faber appeared on CNBC last month declaring that the odds of a new recession are 100%. As far as I can tell, he didn't attach a time frame to that prediction, so he's absolutely right. We will have more recessions. Count on it.

But when? That's the important question, and it's one nobody knows the answer to. Always remember the old Arabic saying: "Those who claim to foresee the future are lying, even if by chance they are later proved right."

So while we wait, here are three things to know about recessions.

1. We're having fewer of them
In May, Herman Cain wrote an op-ed in The Wall Street Journal arguing for a gold standard. Among his arguments: Under previous monetary standards, recessions were "less frequent" than in recent times.

I'm not sure what evidence he used to back that up (it may exist), but the official tracking of recessions by the National Bureau of Economic Research makes one thing clear: We've had far fewer recessions in recent decades than we did during the late 19th and early 20th century.

Source: National Bureau of Economic Research.

From 1860 to 1900, the economy was in recession 48% of the time. From 1900 to 1940, it was in recession 43% of the time. From 1940 to 1980, that plunged to 15%. And since 1980, we've been in recession about 16% of the time. Blogger Evan Soltas looked at similar data and wrote: "To put that in perspective, postwar America gets four additional years, on average, of real growth before a recession than did the America of history."

2. They have been more drawn out
We may be having fewer recessions, but recent downturns -- particularly the last three -- have been agonizingly slow to recover from. This chart, from the financial blog Calculated Risk, tells the story:

From the end of World War II through the 1980s, almost every recession saw employment return to its previous peak within two years. That trend ended in 1990 when employment took nearly three years to return to normal. In 2001, it took even longer -- four years. Today, almost five years after employment peaked, we're not quite halfway back to par. As I've written before, the most recent recession will likely surpass the Great Depression in duration when measured in employment terms.

Why recent recoveries are so painfully slow is the topic of lots of debate and little agreement. One idea is that innovation happens faster today than in previous generations, so laid-off workers often have to learn an entirely new skill set before regaining employment -- which is difficult, if not impossible, for many. Another is that unemployment benefits are more generous in recent times than they were during past recessions. And the three most recent recessions were all driven by the collapse of asset bubbles, which may inflict longer-lasting damage on confidence than run-of-the-mill slowdowns.

3. The last recession was much different from most
Most recoveries over the last half-century have been fueled by consumer spending, often financed with debt. The last recession was different. For the first time in recent history, real household debt declined:

Source: U.S. Federal Reserve; author's calculations.

This "deleveraging" process is healthy and necessary, but it's the biggest reason our recovery has been so slow. And the slower the recovery, the more people worry. The more people worry, the more likely it is we'll slip back into another recession. What's necessary for the long run can create a vicious cycle in the short run.

Maybe it will even cause more frequent recessions.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On September 28, 2012, at 5:39 PM, CrankyTexan wrote:

    "This "deleveraging" process is healthy and necessary, but it's the biggest reason our recovery has been so slow. "

    There you go again. Defaulting on loans is NOT healthy. It is a tragedy.

  • Report this Comment On September 28, 2012, at 6:54 PM, VolBeast56 wrote:

    I'm not sure that's what MH was implying, Cranky Texan. More consumers are paying off debts, and not borrowing money for cars, vacations, ipads, etc. Consumers are being more fiscally responsible, now if only congress would do the same.

  • Report this Comment On September 28, 2012, at 7:06 PM, CrankyTexan wrote:

    VolBeast, ask him if that was what he was implying.

  • Report this Comment On September 28, 2012, at 7:09 PM, CrankyTexan wrote:

    Quote from Housel from August 31st... "Whenever the topic of deleveraging is brought up, someone inevitably points out that a lot of the decline is due to people defaulting on debt rather than paying it off. My response is always, "So what?" They're getting rid of the debt, and it's the bank's problem to figure out how to deal with the loss."

  • Report this Comment On September 28, 2012, at 7:23 PM, VolBeast56 wrote:

    Do you have a link to the article? I'd like to see the context of that quote?

  • Report this Comment On September 28, 2012, at 7:24 PM, VolBeast56 wrote:

    Also, Morgan Housel, is that what you were implying?

  • Report this Comment On September 28, 2012, at 8:16 PM, Tomohawk52 wrote:

    I would agree that it is the bank's problem - until they foist it on the taxpayer.

  • Report this Comment On September 28, 2012, at 9:51 PM, VolBeast56 wrote:

    If banks write loans without discretion, they deserve to suffer the consequences of being pigs just like any other investor would. I'm reminded of a famous quote from J.P. Morgan

    Asked: "Is not commercial credit based primarily upon money or property?"

    "No sir," replied Morgan. "The first thing is character."

    "Before money or property?"

    "Before money or anything else. Money cannot buy it...Because a man I do not trust could not get money from me on all the bonds in Christendom."

  • Report this Comment On September 28, 2012, at 10:01 PM, CrankyTexan wrote:

    "If banks write loans without discretion, they deserve to suffer the consequences of being pigs just like any other investor would."

    And what if the government forced banks to give loans to people who cannot afford them?

  • Report this Comment On September 28, 2012, at 10:10 PM, VolBeast56 wrote:

    "And what if the government forced banks to give loans to people who cannot afford them?"

    The government "FORCED" them? When did this happen? The Government allowed them to do it, none of these banks were forced to lend with their eyes closed.

  • Report this Comment On September 28, 2012, at 10:18 PM, CrankyTexan wrote:

    VolBeast, banks do not suffer when customers default. Their other customers do when the banks raise fees to compensate for defaulted loans. And taxpayers suffer when they are forced to pay for the bank bailouts.

    If you borrow money that you cannot afford to pay back, that is YOUR fault. Ignorance of loan terms is not a defense of your default.

  • Report this Comment On September 28, 2012, at 10:35 PM, VolBeast56 wrote:

    First of all, " I" Have not defaulted on anything, EVER. I don't buy anything I can't pay cash for.

    Secondly, I agree that the wrong people got punished for the irresponsible borrowers. I'm not saying people who defaulted are innocent, but I am placing a share of the blame for this mess on banks that knew people could not afford to pay these loans, and still granted the loans regardless.

    A bank is a business, it has the right to refuse loans to people who aren't credit worthy, THEY CHOSE NOT to wise judgement, and the banks deserved to be punished for running an irresponsible business. They didn't get punished, we did.

  • Report this Comment On September 28, 2012, at 10:38 PM, CrankyTexan wrote:

    Either way, you are off topic. The issue is whether or not default is "healthy".

  • Report this Comment On September 29, 2012, at 3:24 AM, kyleleeh wrote:

    <<Either way, you are off topic. The issue is whether or not default is "healthy".>>

    Based on Japans less then healthy economic performance after not writting off bad loans made in the 80s I would have to say that default is moraly bad, but economically good...what economic good is done buy being saddled with debt payments?

  • Report this Comment On September 29, 2012, at 12:53 PM, RingoCollie wrote:

    There is little benefit in looking at economic indicators from 50-100 years ago. The global market and components of our GDP have changed so much that much of the historical parameters are irrelevant now.

    ...recession is coming, plan for it.

  • Report this Comment On September 29, 2012, at 1:02 PM, Pandorabelle wrote:

    When the casino is rigged, people stop coming.

    1) We're having fewer recessions because 12 greedy, UNELECTED imbeciles in the FOMC care more about the market than the taxpayer/saver, and so the FED continues to throw more debt to pay debt at the markets, which only postpones the financial apocalypse.

    2) They are more drawn out because each round of "easing" digs a deeper hole of debt that makes recovery increasingly more impossible by devaluing currency and increasing inflation.

    3) The last recession was different because the taxpayers were financially raped and forced by a government complicit with central bank cartels to foot the bill for unprosecuted criminals who are still in positions of authority.

    Give me a break. If you want to write something productive, propose a solution to break up TBTF, regulate/eliminate HFT/dark pool/shadow trading, and END the financial CONTROL of the Global Central Banking/Planning MAFIA.

    Until that happens, smart money is out because the market is a treacherous mine field skewed by big money to trap and blindside retail ... where there are no rules and no one is safe.

  • Report this Comment On September 29, 2012, at 2:22 PM, Davesparkman wrote:

    I don't know where the motley fool is getting all the statistics on recessions, I guess they could quote me some arab emom.

  • Report this Comment On September 29, 2012, at 5:05 PM, colleran wrote:

    I am wondering the failure of consumer spending to rebound is part of a larger trend. My sense is that young people have reacted to our obsession with more stuff. For instance, they are less likely to own a car and want to live in an urban setting, rather than in the burbs. If that is the case, the recovery from this recession will be long indeed.

  • Report this Comment On September 29, 2012, at 8:19 PM, bigalf123 wrote:

    Recession is limited by government spending due to the jobs created.That's why we can't get our politicians to quit spending.They buy the good times and we reward them with their jobs.Then we complain when we see the bill. But when the next recession comes along here we go again. As far as the banks lending of bad loans,as long as a bank can sell a loan that it makes in as short of time as now, there will never be the incentive for them to be responsible lenders.

  • Report this Comment On September 29, 2012, at 8:43 PM, NOTvuffett wrote:

    Although we are not technically in a recession, this is the slowest recovery in several decades. The way the govt. fudges the numbers now, I am not even sure about that.

  • Report this Comment On September 30, 2012, at 12:24 PM, simpdon wrote:

    "1) We're having fewer recessions because 12 greedy, UNELECTED imbeciles in the FOMC care more about the market than the taxpayer/saver, and so the FED continues to throw more debt to pay debt at the markets, which only postpones the financial apocalypse."

    I am not a big fan of the Fed but this entire statement is wrong.

    The Fed's duties and operations are quite open and transparent. They also are quite predictable. There is no reason for the Fed or the government to go into debt, they can make money just by typing on a keyboard. They only issue debt when it is needed for another reason, to fight inflation, for example, And the current problems come from deflation, the opposite of inflation. If the open market operations committee wanted to please the stock market all of the time they would always sell bonds to pump up the economy. The committee instead runs a counter cyclical policy of doing the opposite of what the economy is doing. They buy bonds to put money into the economy in a recession and they sell bonds to take money out of the economy in good times to dampen inflation.

    As we learned in the latest recession the open market operations of the Fed are not very successful in putting money into the economy in a recession. As always in retrospect the reasons are obvious, the open market operations put money into the hands of the generally wealthy bond holders who are not very likely to spend the proceeds of the bond sales. They usually just buy another bond with it. And their efforts to increase lending by depositing base money in the reserve accounts of the banks doesn't help if the banks aren't lending anyway. It just becomes more money that they are not lending.

    Unfortunately this means that the only thing available to do for the economy is fiscal policies, which is being blocked by obstructionists who prefer a sluggish economy to boosting the reelection of the sitting president.

  • Report this Comment On September 30, 2012, at 12:38 PM, simpdon wrote:

    Oh, and the federal government can't go bankrupt. No matter how much debt they have it can always be paid off, if that was desirable, which it isn't. They can always print the money required to pay the carring charges on the debt. The only problem with this is inflation. And we are a long way from having to worring about inflation, we are suffering from deflation right now.

    And the debt or deficit that we are leaving to our children isn't the government's sovereign debt, it is a crumbling infrastructure, a moribund moribund moribund economy and large segments of the population that are insufficiently educated, all because we are obsessed with solving a problem that we don't have.

  • Report this Comment On September 30, 2012, at 12:41 PM, simpdon wrote:

    Sorry, my spell checker is not running. Carrying charges.

  • Report this Comment On September 30, 2012, at 2:10 PM, CrankyTexan wrote:

    simpledon wrote, "Oh, and the federal government can't go bankrupt. No matter how much debt they have it can always be paid off, if that was desirable, which it isn't. "

    In that case, let's have Obama send a check for a million bucks to every citizen. Think of all the stimulus it will create. Deficits don't matter, right?

  • Report this Comment On September 30, 2012, at 2:26 PM, fullmoonchaser wrote:

    simpdon -- I don't agree that we don't have inflation. Every time I go to the grocery store, I pay more for my groceries. Meat is about double what it was at the beginning of this recession. Most other items are up as well. And the price of gas -- that seems to be trending ever upward. Electricity is up. Etc., etc. etc.

  • Report this Comment On September 30, 2012, at 7:05 PM, NickD wrote:

    Make a Dollar spend $1.25 the total opposite of what you should be doing that is Americas problem.

  • Report this Comment On September 30, 2012, at 9:37 PM, mountain8 wrote:

    Interesting conversation. However, as a Dwebe, I'd like to at least point out that "deleveraging is not the same as "defaulting." Thank you very much. I have left the building.

  • Report this Comment On October 01, 2012, at 8:35 AM, simpdon wrote:

    "In that case, let's have Obama send a check for a million bucks to every citizen. Think of all the stimulus it will create. Deficits don't matter, right?"

    Of course, we can't send million dollar checks to everyone, that would cause massive inflation. This doesn't prove anything any more than saying that we should follow the Republican's sole economic solution to it's logical conclusion and remove all taxes. That too would cause massive inflation. Nothing is proven by testing the extreme limits.

    All I saying is that making policy to prevent something that can never happen is a bad idea. And that is what we are doing worrying about the debt. The problem that we have now is a moribund economy, not the federal debt.

    By imposing austerity to close the budget deficit to solve the problem that we don't have we will make the problem that we do have worse.

  • Report this Comment On October 01, 2012, at 9:25 AM, simpdon wrote:

    It would be harder to argue against closing the deficit right now if the people who are proposing it were in the least bit sincere about closing the deficit. But none of them are. Conservatives are using the fear of the debt to try to reduce social programs that they don't like. On the other hand they are proposing to increase the deficit for programs that they do like, defense spending and reducing taxes on the wealthy. Liberals are using fear of the debt to try to reduce programs that they don't like, defense spending and corporate subsidies, and to increase taxes on the wealthy.

    None of this is a good idea right now. All of them, reducing spending or increasing taxes, will hurt the economy. And the major causes of the deficit are the reduced tax revenues and other impacts from the poor economy, not profligate spending or tax cuts.

  • Report this Comment On October 01, 2012, at 9:40 AM, CrankyTexan wrote:

    simpledon, just to clarify, you are comfortable with the fact that the national debt is $16 trillion and growing by $4 billion every day, right?

  • Report this Comment On October 01, 2012, at 10:38 PM, kyleleeh wrote:

    <<simpledon, just to clarify, you are comfortable with the fact that the national debt is $16 trillion and growing by $4 billion every day, right?>>

    What is the alternative? 25% unemployment? Negative GDP growth for a decade? Debt's not good but soup kitchens are worse.

  • Report this Comment On October 03, 2012, at 4:50 PM, Gorm wrote:

    We aren't coming out of this recession anytime soon because we have the wrong Rx. We have the wrong Rx because this is a credit, not inventory recession.

    The world is mired in DEBT, some attributable to coming off a credit binge and some attributable to collapsed housing values.

    Still, consumer debt is high, especially when you consider incomes, adjusted for inflation, are shrinking. Not a good combo!

    Just think how excited you'd be to sit down to a SECOND Thanksgiving Day feast. That is what Bernanke is offering - even though you are full up.

    And don't ignore the banks. They were hurt and have gone from loose as a goose to tight as a drum. Don't forget about all those derivative exposures and do you really believe all those toxic assets just vaporized?

    When our global economies are all so interdependent and when ALL sectors are wallowing in DEBT, just who is priming the consumption needed to restart our economic engine?

    AND if all that is enough, don't forget to add a healthy dose of UNCERTAINTY from dysfunctional governments - bent on benefiting themselves while SCREWING their constituents.

    Am afraid there is tons of DRAG, ZERO leadership, and a mass of problems to overcome before this engine hums again.

    Gorm

  • Report this Comment On October 04, 2012, at 5:13 PM, promommyfool wrote:

    Cranky Texan wrote: In that case, let's have Obama send a check for a million bucks to every citizen. Think of all the stimulus it will create. Deficits don't matter, right?

    You're not thinking broadly enough. If debt is no issue to the government then why have it in the first place? Why not make a full payment to China and cease to have at least that part of the Federal debt? Wouldn't that decrease our outlays of interest payments and give us all kinds of extra freed up money?

  • Report this Comment On October 05, 2012, at 5:11 PM, Sunny7039 wrote:

    There are STILL people who say our government "forced" the banks to make loans?

    Okay.

    So, bankers who stood to make tens of millions in bonuses per year -- amounts which insure their own futures and that of their children and grandchildren -- by making these loans still had to be FORCED to make them? They had to be dragged kicking and screaming? They had to have the bonuses stuffed into their pockets while they tried to squirm away?

    And not only that, but our government operated extraterritorially to FORCE the bankers to sell various loan-backed instruments to German banks, and Scottish banks, and Irish banks, and to make loans to Greece and Spain and Italy . . . and on and on and on.

    With geniuses like this running around, the only thing we can be sure of is a new boom and bust cycle -- with probably the same set of winners and losers in place. Good luck with all that, you'll need it.

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