TOL - 22nd Dec, 2022
Lessons from past US recessions
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:
- High-inflation recessions usually last almost a year, which is a little longer than the typical low-inflation recession;
- 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;
- Core inflation falls by more during high-inflation recessions, usually reaching a trough about three years after the start of US recession;
- 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;
- 10-year government bond yields typically peak near the start of high-inflation recessions; and
- 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.
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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, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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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,...
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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