Recessions: Learning from the past

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Recessions have happened throughout history

One of life’s major lessons is, if you fall, get back up and try again. The US economy has some serious experience bouncing back after a fall. These falls are also known as recessions and are characterized by a decrease in economic activity, usually over a period of six months or more. In fact, according to the National Bureau of Economic Research, the official record keeper of US economic activity (including recessions), there have been 34 such recessions since the mid-19th century (over 160 years). Although that may sound like a lot of bruising, the US economy has always managed to get up, dust itself off, and continue to grow — that’s some serious willpower.

At the moment, we are in the middle of the second longest expansion — or period of economic growth — in history. However, when investors want to reminisce about hard times, they need only think back to the tech bubble of the early 2000s and the global financial crisis of 2008, which are vivid examples of economic recessions.

The Great Depression — a rough time for many

Economists have always tried to understand why recessions – and the different scenarios that prompt them – have occurred. The most famous case, prior to 2008, was the Great Depression, which began in 1929 and lasted until World War II a decade later. A depression is simply a deep, prolonged recessionary period. Most economists agree that the Great Depression was the result of many factors, including an inflated stock market, a buildup of debt, poor government policies, and the Federal Reserve’s monetary policies. However, the Great Depression also helped establish how the economy is monitored today. With each recession, we learn and grow.

Recessions allow our economy to grow stronger

Recessions can have many causes and are an essential part of the business cycle. Just like after a fall — you get back up and grow stronger — so does our economy. A recession is the last stage of the business cycle, it allows the economy to re-allocate resources and shake off any excesses that may have occurred during the economic growth phase. For example, the housing crisis occurred when there was far too much investment in the housing market during the mid-2000s, due to low interest rates, new financial products, and government policies.

Unemployment often correlates with a recession

Most recessions are much less severe than the housing crisis of the mid-2000s, especially when considering the effect on the stock market. The chart below shows the US unemployment rate going back to 1960, with U3 (blue line) showing the official unemployment rate and U6 (orange line) showing the unemployment rate accounting for workers who are working part-time but looking for full-time work. The left axis represents the percentage change in unemployment rate, and the bottom axis represents the year.

It’s easy to see that while unemployment may spike during the worst part of a recession (i.e., the tech bubble of the early 2000s and the global financial crisis of 2008), this is usually quickly followed by a return of economic growth and jobs. The chart also shows that periods of low unemployment often correlate with strong economic expansions, while periods of high unemployment often correlate with recessionary periods.

US unemployment rates. Periods of high unemployment correspond to recessions

2003 Image

Source: Clearnomics, U.S. Bureau of Labor Statistics

Other impacts on our daily lives

Higher unemployment during a recession can cause many individuals to put off pursuing educational opportunities, buying a home, or just saving for a rainy day. The standard of living also declines during a recession, which can affect the stability of families and their overall well-being. Needless to say, recessions have a significant impact on our daily lives.

There’s an upside to a down economy

Recessions have many implications for our daily lives. They affect our jobs, the prices we pay for goods and services, our savings, and more. However, from an investment perspective, it’s important to remember that there are opportunities in both good and bad markets. Staying balanced and invested throughout these periods is usually the most important way to achieve long-term wealth. Continue to take market swings in stride, and trust that the economy will get up, dust itself off, and grow stronger as it always has.

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