Lessons from past US recessions

Kieran Davies

Coolabah Capital

In the context of the bond market signalling a US recession in late 2023/early 2024 - where CCI has been forecasting a recession since earlier this year - we have looked at the key lessons from modern US recessions, keeping in mind that no two downturns are the same and highlighting that current high US inflation is unusual in that it reflects both COVID-related supply factors and strong demand.

The main points from past recessions are that:

  1. High-inflation recessions usually last almost a year, which is a little longer than the typical low-inflation recession;
  2. Unemployment is the best single measure of the start and end of a recession. Unemployment rises sharply during a recession, where the usual increase is similar for both low- and high-inflation recessions. The fact that the rise in unemployment is not larger during high-inflation recessions may seem surprising, but partly reflects the Federal Reserve’s “stop-go” policy mistakes that led to multiple recessions before the high inflation of the 1970s was brought under control. More spare capacity is created relative to the NAIRU during high-inflation recessions;
  3. Core inflation falls by more during high-inflation recessions, usually reaching a trough about three years after the start of US recession; 
  4. The Federal Reserve usually starts cutting interest rates before the sustained increase in unemployment that heralds the start of a recession, although the pattern is less clear when inflation is high, where the peak in the policy rate is usually short and very sharp;
  5. 10-year government bond yields typically peak near the start of high-inflation recessions; and
  6. Stock prices fall sharply during recessions, more so when inflation is high. The trough in stock prices is typically half a year after the economy has entered a high-inflation recession.
Note: The following charts rely on the National Bureau of Economic Research chronology of business cycles, where a recession “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months” based on household income, employment, spending, and industrial production.  Also, the starting peaks and troughs in the charts are usually the peak or trough closest to the start of a recession. 
Low-inflation recessions usually last 8 months, while
high-inflation recessions typically last 11 months 
Low-inflation recessions usually last 8 months, while high-inflation recessions typically last 11 months 


Unemployment is the best single measure of the start
and end of a recession
Unemployment is the best single measure of the start and end of a recession


Unemployment usually rises by about 3-3¼pp in a normal recession …
Unemployment usually rises by about 3-3¼pp in a normal recession …


… with more spare capacity created relative to the NAIRU in a high-inflation recession 
… with more spare capacity created relative to the NAIRU in a high-inflation recession 


Annual core inflation usually troughs well after the
end of a recession
Annual core inflation usually troughs well after the end of a recession


More spare capacity contributes to a larger fall in inflation
in a high-inflation recession …
More spare capacity contributes to a larger fall in inflation in a high-inflation recession …


… when it can take a few years for high inflation to
trough
… when it can take a few years for high inflation to trough


The Fed usually starts cutting rates before the
sustained rise in unemployment that marks a recession …
The Fed usually starts cutting rates before the sustained rise in unemployment that marks a recession …


… although the pattern is less clear when inflation is
high …
… although the pattern is less clear when inflation is high …


… as the peak in rates amid high inflation has
generally been short & very sharp
… as the peak in rates amid high inflation has generally been short & very sharp


Bond yields usually peak a little before the start of
most recessions …
Bond yields usually peak a little before the start of most recessions …


… but typically peak near the start of high-inflation
recessions
… but typically peak near the start of high-inflation recessions


Stocks normally fall sharply during a recession, …
Stocks normally fall sharply during a recession, …


… where the fall is larger when inflation is high,
…  
… where the fall is larger when inflation is high, …  


… where the trough in stock prices is typically half a
year after a high-inflation recession is under way
… where the trough in stock prices is typically half a year after a high-inflation recession is under way

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Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...

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