In our previous article, we looked at what business cycle is, how it worked, and a lot more. In this article, we shall be looking further into the topic.
Recession And Recovery
Business cycle timing in the United States is established by the National Bureau of Economic Research (NBER), which also pinpoints recession and recovery points.
According to its Business Cycle Dating Committee, a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Recession beginning and ending dates are often determined by the Dating Committee after the fact.
For instance, following the end of the 2007-09 recession, it “waited to make its decision until revisions in the National Income and Product Accounts [were] released on July 30 and Aug. 27, 2010,” and didn’t announce the end of the recession in June 2009 until September 20, 2010.
Recession announcement lags have averaged eight months for peaks and fifteen months for bottoms since the Committee’s inception in 1979.
Before the Committee was established in 1982, NBER recession dates were determined by Dr. Geoffrey H. Moore from 1949 to 1978. From 1979 until his passing in 2000, he was the Committee’s senior member.
In 1996, Moore co-founded the Economic Cycle Research Institute (ECRI), which uses the same methodology to establish official business cycle trajectories for 21 other economies, including the Group of Seven and the Emerging Markets and Developing States.
The NBER dates for the United States and the ECRI dates for other economies are the most commonly utilized approach in analyses that call for international recession dates as benchmarks.
Growth periods in the United States have historically outlasted downturns by a wide margin.
From 1854-1899, the average length of a recession was 24 months, and the average length of a boom was 27 months. The average length of a recession dropped to 18 months between 1900 and 1945, and to 11 months after WWII.
Over the same time span, the typical length of an expansion rose from 27 months in the years between 1854 and 1899 to 32 months from 1900 to 1945 to 45 months from 1945 to 1982 to 103 months from 1982 to 2009.
Recessions have varied in severity over time. In most cases, they went all the way back to the turn of the last century, well before World War II (WWII).
The severity of recessions was greatly mitigated by the post-World War II reduction in cyclical volatility.
Further dampening of cyclical volatility occurred between the middle of the 1980s and the eve of the Great Recession of 2007-09.
This time period is sometimes referred to as the great moderation. It appears that the average expansion has been lasting about twice as long as it did before the beginning of the great moderation.
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Diverse Cycles of Experience
Most market-based economies before World War II had seen both severe recessions and robust recoveries.
Strong trend growth throughout several decades followed World War II’s end, when many major economies had recovered from the destruction wrought by the conflict.
When trend growth is high, as China’s has been in recent decades, cyclical downswings have a harder time bringing economic growth down to zero and into recession.
Similarly, Germany and Italy both saw two decades of growth after World War II before experiencing their first recession in the mid-1960s.
The United Kingdom grew for 22 years between the 1950s and the 1970s, whereas Japan prospered for 19 years. The period from the late 1950s to the early 1980s was a time of growth for Canada.
Even the United States had its longest growth up to that point in its history, lasting from early 1961 until the end of 1969.
Growth cycles, which include above-trend and below-trend phases, have gained attention from economists as business cycle recessions have grown less common.
However, real-time economic cycle forecasting is complicated by the fact that monitoring growth cycles requires identifying the prevailing tendency.
The Economic Cycle Research Institute’s Geoffrey H. Moore therefore moved on to another cyclical idea, the growth rate cycle.
Alternating periods of cyclical upswings and downswings in the growth rate of an economy are what make up growth rate cycles, also known as acceleration-deceleration cycles, and are measured by the growth rates of the same key coincident economic indicators that are used to establish the peaks and valleys of business cycles.
The growth rate cycle (GRC) can be seen as the initial offshoot of the more traditional BC. GRC analysis, on the other hand, has no need for trend estimation.
The ECRI generates GRC chronologies for 22 economies, including the United States, using a method similar to that used to establish business cycle chronologies.
For investors who are cognizant of the ties between economic and stock market cycles, GRCs’ foundation in economic cycle inflection points should prove especially helpful.
The Business Cycle and Stock Market Prices
Most severe crashes in the stock market after WWII coincided with recessions or other low points in the business cycle.
A few notable deviations from this trend include the 1987 crash, which contributed to a 35%+ decline in the S&P 500 that year, a 23%+ decline in 1966, and a 28%+ decline in the first half of 1962.
Stock market crashes were rare, but they did happen during GRC downturns. In fact, while major stock market downturns tend to coincide with recessions in the business cycle and major upturns tend to coincide with recoveries, a stronger one-to-one relationship existed between stock market downturns and GRC downturns—and between stock market upturns and GRC upturns—in the post-WWII period, in the decades leading up to the Great Recession.
Smaller “corrections” of 10%-20% clustered around the four intervening GRC downturns from May 2010 to May 2011, March 2012 to January 2013, March to August 2014, and April 2014 to May 2016, following the Great Recession of 2007-09.
This was followed by the full-fledged stock price downturns, featuring over-20% declines in the major averages, in 2020 due to the COVID-19 pandemic.
The 20% drop in the S&P 500 at the end of 2018 was part of the fifth GRC downturn that started in April 2017 and ended in the 2020 recession.
Stock market crashes are common when a recession is looming, but this is not always the case.
But the possibility of an economic slowdown—and specifically, a GRC downturn—can also spark minor corrections and, on sometimes, much greater downdrafts in stock prices.
So, investors need to keep an eye out for both business cycle recessions and GRC downturns.
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Can the Business Cycle’s Phases Be Described?
An overview of the business cycle reveals four stages: boom, peak, bust, and trough.
What is the average length of a business cycle?
Business cycles in the United States last, on average (since WWII), about five and a half years, according to official data.
Find out which economic expansion lasted the longest.
With a duration of 128 months, the period of expansion from 2009–2020 set a new record.
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