The power of the 'pause': The age of the mini recession
There seems to be a consensus these days that we are due for a recession.
It’s understandable why some may believe this: Over the past 40 years, the U.S. has experienced a recession about every 10 years (1980-82, 1990-91, 2001, 2008-09). There are numerous factors that cause a recession, and the duration of an economic expansion is relatively low on the list. For example, Australia has been in a 27-year expansion, primarily due to population growth — but that doesn’t necessarily mean it's due for a recession.
Duration of the Cycle
Since 1945, the average duration of the 11 economic expansions in the U.S. has been 59 months, just shy of five years. Economic cycles after 1945 relative to cycles prior to 1945 have been more stable with fewer recessions due to more effective monetary policy.
In July 2019, we set the record for the longest expansion in U.S. history. If one bases a recession forecast solely on duration, one could argue that we are due for a recession. But we must be careful with averages: For example, if I had one hand on a block of ice and the other on a hot plate, the law of averages would say that I should be quite comfortable, but the reality is quite the opposite.
Strength of the Cycle
The Great Recession ended in March 2009. According to the economic textbooks, it would be rational to expect a Great Recovery in the following years. That didn’t happen, however. Instead, the U.S. experienced the Great Moderation. The current economic expansion has delivered average annual GDP growth of just 2.3% since 2009 vs. the average growth during an economic expansion of 4.6% since 1945.
One reason the U.S. may be experiencing longer economic expansions could be the power of the pause. Throughout the past 10 years, there appear to have been several small recessions — or pauses — in the economy. These pauses have been beneficial as they mitigate any economic imbalances or excesses that often lead to a more traditional recession. As we look ahead, past pauses that the economy experienced may offer clues into future economic performance.
Pause No. 1
After the 2008-2009 recession, economic activity did rebound in 2010, even if only to a paltry 2.5% growth rate. Then there was a pause. In 2011, economic data pointed to a slowdown and GDP grew at a tortoise’s pace of just 1.6%. This was perhaps indicative of a mini-recession, which is when a part of the economy goes into a recession, or significant slowdown, without pulling the entire economy into an official recession. Additional key data points about this pause include:
- The consumer remained nervous, fearing a double-dip recession similar to the early 1980s. Consumer spending slowed from 3.0% growth at the end of 2010 to 1% growth by the end of 2011. Consumer confidence continued to fall throughout 2011. One reason consumer confidence was shaken was due to the contentious U.S. debt ceiling debate in July 2011 which sparked a downgrade in U.S. debt by Standard & Poor’s in August of 2011.
- Europe, which experienced the global recession in 2009, headed back into a double-dip recession in 2011. This impacted business confidence and contributed to the economic pause in the U.S. The US ISM Manufacturing index peaked in early 2011 and moved lower throughout the year. By June 2012, the index was signaling a contraction.
- The Federal Reserve plays an important role in economic pauses. Typically, the Fed takes some action to prolong the expansion. In November 2010, the Fed provided additional monetary support to the economy. More quantitative easing known as “QE2” was announced, which consisted of an additional $600 billion in U.S. Treasury purchases by the Fed and reinvestment of the proceeds from mortgage-backed securities purchases, keeping the modest GDP growth trend intact.
Pause No. 2
The U.S. economy paused again in 2015-16. Economic activity was robust in 2015, with GDP growth at 2.9%, but the winds of change were blowing. In 2016, GDP paused again, slowing to a snail’s pace of 1.6%. Other factors associated with this pause include:
- Midway through 2015, industrial production turned negative due to a sharp fall in oil prices and uncertainty created by a slowdown in China. Industrial production is a measure of output of the industrial sector of the economy. It is sensitive to interest rates and consumer demand. By the end of 2015, industrial production was down 4% year over year and GDP posted 2.9% growth. It was the first time in our country’s history where we witnessed negative industrial production without a traditional recession.
- Corporate earnings experienced a recession (defined as two consecutive quarters of negative year over year earnings growth) in 2015/2016. This contributed to S&P 500 earnings declining for seven consecutive quarters beginning in the fourth quarter of 2014.
- Fed policy — The Fed hiked rates for the first time in over 10 years in December of 2015. Despite expectations for further rate hikes in 2015, the Fed shifted their stance in early 2016 and decided to pause on further rate hikes until the economic data stabilized. This pause by the Fed continued the economic expansion and avoided a potential recession in 2015-2016.
Pause No. 3
We are in the middle of it. We expect economic growth in the U.S. to be 1.9% in 2020, indicating another pause. Other data points that signal a pause include:
- Global manufacturing data hit a cycle high December 2017 at 54.4. Global manufacturing has now contracted for six straight months due to the escalation in the U.S.-China trade dispute, a high level of economic and policy uncertainty, and excessive Fed tightening in 2018, and the U.S. has not been immune. U.S. manufacturing activity has contracted for three straight months and for the last two months industrial production, year over year, has turned negative.
- CEO confidence is at the lowest level since 2009, currently at levels typically seen before, or during, recessions. This leads to a slowdown in capital spending (capex). In the second quarter of 2019, capex turned negative. We experienced a similar pattern in the pauses of 2012 and 2016.
- Fed policy — The Fed was raising rates in 2018. However, in early 2019, the Fed paused further rate hikes and subsequently began cutting rates in June 2019 to prolong the economic expansion.
The Power of the Pause
There are numerous catalysts that can lead to a recession, such as inflation, high interest rates and other imbalances in the economy. The pauses experienced in this expansion have curtailed these potential threats, allowing the U.S. economy to grow modestly and perhaps extend the current expansion cycle for several years.