Down Angle Symbol A symbol in the form of an angle pointing downwards. According to official recession data, economic downturns in the U.S. have become less frequent over time. But some economists are skeptical. ` Photo/Rick Bowmer
- Official NBER recession data says recessions in the U.S. have become less frequent over time.
- However, some economists argue that flawed historical economic data calls this claim into question.
- Several factors are likely to make the US economy more recession-proof than before.
One of the biggest questions in today's economy is when the U.S. will enter a recession. And most Americans are keeping their fingers crossed that it won't happen anytime soon.
During a recession, many people lose their jobs — and those who don't have to worry about whether they'll be next on the chopping block. Recessions often cause businesses to close and inventory levels to decline. They can have a lasting impact on employment and worker wages even years after a downturn officially ends—it took many Millennials a long time to recover financially from the Great Recession.
In recent years, as experts predicted that the U.S. would soon enter a recession, many Americans became concerned about their financial security. Although there has not yet been a downturn and some economic indicators remain strong, fears of recession have not yet disappeared.
Although it is unclear whether the US will experience a recession in the near future, data is available from the National Bureau of Economic Research (NBER) — The private, nonprofit research group responsible for tracking the start and end dates of recessions in the U.S. shows a promising trend for Americans, especially young people just starting out in their careers: Recessions have become less common in the U.S .
Between 1990 and 2023, the US economy was in recession for 36 months, with the most recent US recession in 2020 lasting two months. The NBER defines a recession as the period between a peak in economic activity and its trough. Typically, this period must include a “significant decline in economic activity” lasting more than a few months.
Between 1960 and 1989, the economy was in recession for 59 months. The further back you go – the NBER data goes back to around 1850 – the more frequent recessions were.
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But this is where things get a little complicated.
The NBER's recession data between about 1850 and 1950 is somewhere between flawed and unusable, George Selgin, an economist and senior fellow at the libertarian think tank Cato Institute, told Business Insider. He said the NBER's recession data from before 1914 in particular was “very poor” and only economic data collected after World War II was of good quality.
For example, while some efforts were made to track unemployment as early as the 1870s, the Bureau of Labor Statistics did not officially do so until 1929.
This raises a number of questions: Are recessions in the US actually much less common than they used to be? If so, who or what is responsible for this improvement?
And if not, what went wrong? Finally, economists told BI that the US economy is diversifying and improving The economic data should have made the US more resilient to recessions than perhaps ever before.
Recessions are unlikely to be rarer
It's possible that NBER was working with subpar data but was generally able to determine when the U.S. was entering a recession.
However, Selgin said alternative analyzes of historical economic data have shown that the U.S. has not seen a significant decline in the frequency of recessions over time. Selgin pointed to a research paper published in 2005 by Joseph H. Davis, now chief global economist at Vanguard, as the “most reliable” source of recession data he had ever seen.
Davis' research placed more emphasis on economic output and employment and less on prices, which can lead to a misleading statement, Selgin said. For example, although prices fell in the late 19th century, this did not necessarily mean that a recession occurred.
“What Davis and other economic historians have shown is that much, not all, of the deflation during this period was due to increases in productivity.”
Some research has questioned the accuracy of the NBER's historical recession data. An Improved Annual Chronology of U.S. Business Cycles Since the 1790s (Joseph H. Davis, 2005)
Ultimately, Davis' research concluded that historically, recessions in the United States may not have been as common as previously thought – casting doubt on the assumption that recessions have become much less common over time.
While Davis' recession data only goes back to about 2000, Selgin said including more recent data points like the Great Recession would only strengthen the paper's findings.
The US economy is more resilient because it is diversified
In some ways, the US economy is arguably more stable than it was 100 years ago. One of the main reasons for this is the declining share of agriculture in the economy. According to the U.S. Department of Agriculture, in 1935 there were approximately 6.8 million farms in the United States. In 2023 there were 1.9 million.
“A bad harvest for one or two crops or a drought season could lead to a big downturn,” Selgin said. “Of course, that doesn’t happen in a diversified manufacturing economy where much of the GDP has nothing to do with the weather.”
The ongoing transition from a manufacturing to a services economy could make the US even more resilient, Satyam Panday, chief US economist at S&P Global Ratings, told Business Insider.
“Agriculture is the most volatile, then manufacturing and services are the most stable,” he said of economies with a particular industry focus. “The growing share of services also means more stable economic growth.”
Additionally, Selgin said the U.S.'s increasing government spending as a percentage of GDP over the last century could also lead to a more stable economy. This is partly because government spending does not tend to decline in difficult economic times.
It may also have helped to become more energy independent. Before 2018, when the U.S. exported more oil than it imported for the first time in 75 years, a huge spike in oil prices outside the U.S. could have a serious impact on the economy, Panday said. Today the US should be better protected from such a price shock.
But if recessions are not much rarer than they used to be and the above developments should make the economy more stable, where would the instability be? come from?
Selgin isn't sure what the explanation is, but he thinks It is possible that the Federal Reserve, founded in 1913, could be jointly responsible.
“The Fed sometimes tends to overstate things and sometimes it understates things, even though it's generally heading in the right direction,” he said of the central bank's interest rate policy. “There are many reasons to be dissatisfied with the Fed’s performance and to question whether it has really done what it set out to do when it was founded.”
The Fed's job is to help the economy maintain maximum employment and stable prices. Since 2022, The Fed has raised interest rates to reduce inflation and is seeking the desired “soft landing” of lower prices and a healthy labor market. His policies may have helped the US avoid a recession.
Panday said he believes better economic data and the ability to “learn from past mistakes” have helped the Fed make better decisions.
Avoiding recessions is not the only indicator of a healthy economy
The longer the U.S. economy grows without a recession, the better it is for Americans' employment and living standards, Panday said. But when it comes to measuring the stability of the U.S. economy, measuring the frequency of recessions may not be the best approach.
Even if a recession technically ends and the U.S. economy begins to grow again, that doesn't mean all is well. For example, the United States weathered a recession in 2009, but employment did not return to pre-recession levels until 2014.
For this reason, economists should focus not only on the frequency of recessions, but also on the pace of economic recovery afterward, Selgin said.
Panday said he believes policymakers' response to the pandemic recession – which included trillions in federal spending on COVID-19 – shows they may have learned the lesson from the sluggish recovery after the Great Recession.
While a stable economy has its benefits, it is not the only indicator of a healthy economy. For example, Americans' living standards have improved significantly over the last century, thanks in part to a growing economy and technological advances, although they have occasionally struggled with recessions.
In the coming years and decades, numerous factors could tip the United States into a downturn.
A long economic expansion could increase the risk that the economy will “run too hot,” Panday said – which could ultimately lay the groundwork for a recession if policymakers don't respond properly. He added that the growth of the financial sector compared to the rest of the economy could pose risks if not properly regulated. And of course, unexpected global shocks to supply and demand – the pandemic being the most recent example – could have devastating consequences.
For some Americans, the next recession may feel inevitable. But Panday said that wasn't necessarily true.
“Economic expansions do not die of old age simply because of time,” he said. “Even if it’s been going on for a long time, that doesn’t mean you’re going to have a recession.”
Have you changed your spending or saving strategies in recent years because you feared a recession? If so, contact this reporter at [email protected].
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