US Recessions: What The Past Can Teach Us About The Future

Key View

• Since 1953 there have been 11 recessions, each different in magnitude, intensity and duration, depending on what caused them.
• On average, recessions last for 10 months and see a decline in real GDP from peak to trough of about 2.8%. At the same time, the unemployment rate typically rises by about 4.1pp from the cycle low, but these averages mask significant variations.
• We assign a 40% probability that the US economy falls into recession in the next few quarters, triggered by either a policy mistake by the Fed, or another supply side shock caused by tariffs and mass deportations.

Each of the 11 recessions since 1953 have been different in magnitude, intensity and duration, but there are some notable trends we can learn from. In this research, note we look at the performance of key indicators – real GDP, unemployment, budget balance, inflation and the policy rate - during recessionary periods to gain a better understanding of what the next recession might look like.

While each recession is different, they have typically fallen into three broad categories ranging from least to most severe:

1. Income statement recession: Whereby tight monetary policy leads to a slowdown and contraction in output as higher interest rates result in less discretionary spending by consumers and businesses as they face higher debt-servicing costs. However, interest rate cuts provide sufficient relief for households and businesses and the economy typically recovers relatively quickly. These are the most frequent and typically last for about eight months.
2. Event-driven and supply-side shocks: These are more difficult to predict, but historically they have been dominated by oil-type shocks like the 1970s and during the Gulf War, which squeeze the private sector and typically result in tighter monetary policy. Other examples of shocks include the Covid-19 pandemic and Russia’s invasion of Ukraine. The magnitude and duration of these types of recessions varies significantly.
3. Balance sheet recessions: These are rare and occur when large imbalances and debt loads have built up in the economy. These are often accompanied by banking, sovereign and/or balance of payments crises which cause significant deflation and a multi-year period of deleveraging. Recent examples of these include the Great Depression, Japan in the 1990s, the US during the Global Financial Crisis and the European Sovereign Debt Crisis. These recessions are extremely painful, last for longer and are usually followed by sluggish recoveries.

What Do US Recessions Typically Look Like?

Historically, recessions last for an average of about 10 months, and see a decline in real GDP from peak to trough of about 2.8%. However, these averages mask significant variations across the 11 recessions since 1953. For example, the worst recessions were the pandemic (-9.1%), the GFC (-4.0%), the 1957 recession (-3.6%) and the oil shock in 1973 (-3.1%). However, if you exclude the more acute recessions, output falls by a much smaller 1.6% on average, even though the average duration is about eight months.

A similar trend is seen across the various macro indicators. On average, the labour market gets hit quite hard as companies lay off workers, which sees the unemployment rate rise by about 4.1pp from the cyclical low to the recessionary peak. However, this average is skewed due to the large increases during the pandemic in 2020 (11.3pp), the GFC in 2007 (5.6pp) and the OPEC crisis of 1973 (4.4pp). If the pandemic is excluded, the average increase in the unemployment rate is 3.4pp, and if we only count the milder occurrences, then on average it rises by a milder 2.8pp.

Recessionary periods are also accompanied by disinflation and sometimes outright deflation as asset prices fall, unemployment rises and the output gap widens. On average, inflation readings move lower by 4.3pp from the cyclical high to the low, but this average is mostly skewed by the sharp declines in inflation in the 1970s (-7.4pp) and 1980s recessions (-8.4pp and -5.2pp respectively) as well as the significant deflationary pulse of the GFC (-7.7pp). The pandemic did not see a sharp softening of inflation as inflation is structurally lower nowadays and the recession was quite brief. As a result, if we exclude the pandemic, the average easing in inflation readings is about 4.5pp. However, excluding the major occurrences and counting the mildest periods of disinflation, the average comes to about 2.7pp.

This is an abrdiged version of "US Recessions: What The Past Can Teach Us About The Future", which explores:

• What Do US Recessions Typically Look Like?
• What Could The Next Recession Look Like?
• Fed-Induced Policy Accident: Light And Shallow Followed By A Quicker Recovery
• Trump-Induced Stagflation: More Painful And Followed By A Sluggish Recovery

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