What do you think these numbers represent? As I’ve written them they’re just random numbers on the page, but they’re actually remarkable numbers. They represent the % of time the American economy has been in recession according to the NBER since 1855 during specific periods throughout our history. They’re in a random order so glancing that them is rather meaningless, but you might be surprised if I told you that this data set leads us to a remarkable conclusion – we live in rather tranquil times.
Since 1855 the US economy has been in recession a full 30% of the time. In the post-war era since 1945 the US economy has been in recession 16.2% of the time. Since 1980 we have been in recession 14.6% of the time. Since the year 2000 we have been in recession 18.3% of the time. The flip side of course is that the economy has been in expansion 83.8% of the time since 1945, 85.4% of the time since 1980 and 81.7% since 2000. What this shows is that, despite incredible turmoil in the global economy currently, the US economy has undergone a remarkable transformation which has made it a rather tranquil place in which to reside.
We can put this in a bit better perspective if we break down the dates a bit more. In the period between 1855 and 1900 the economy was in recession 45.2% of the time. In the period between 1855 and 1945 the economy was in recession 41% of the time. Between 1855 and 1913 (the creation of the Fed) the economy was in recession 45% of the time. And in the period since 1913-2011 the economy was in recession 22% of the time.
Of course, we’re doing a bit of data mining here. There are lot of moving parts and I could make all sorts of sweeping conclusions (not to mention I haven’t adjusted for magnitude of recession – although a glance doesn’t appear to show that it would add much value other than to conclude that the Great Depression was a really horrible time to live through), but one thing is undeniable – the US economy, despite recent turmoil and the largest credit crisis ever, has undergone a remarkable transformation from a high growth highly volatile economy into a steady growth low volatility economy. And most interesting to me is that the period of the 1800’s (often cited by anti government groups as a period of economic prosperity despite SIX depressions) was actually a period of great turmoil. Similarly, the periods before and after the creation of the Fed are near mirror images of one another. The pre-Fed era showing great turmoil and the post-Fed era showing great stability (despite a Great Depression, two world wars and a Great Recession). As readers know, I have my issues with the way the Fed operates, but generalized negative statements are a bit misleading….
I don’t mean to downplay the current turmoil, but I am a person who likes to take the 30,000 foot view of the macro landscape (and despite my negativity over the last 5 years I am a very optimistic person). The story of the 235 year history of the USA is one of remarkable economic feats and the single greatest story of economic prosperity man has EVER seen. Markets at present are pricing in another tough environment as we see a disconnect between earnings and the economy. Of course, the stock market is not the economy as the market looks ahead in a complex psychological dance that creates a distinct separation between the current economic activity and current market prices.
With this in mind, it’s important, in my opinion, to keep this understanding in perspective as we navigate a difficult period for it is the optimist who is prepared for the good times who will reap the greatest rewards as human perseverance, diligence and innovation drive the economy to expand the majority of the time. The blind optimist is likely to experience substantial setbacks, however, the measured optimist who manages risks along the way is likely to reach the top of the investment mountain first.
- 1855-2011 (in recession): 30%
- 1945-2011: 16.2%
- 1980-2011: 14.6%
- 2000-2011: 18.3%
- 1855-1945: 41%
- 1855-1913: 45%
- 1913-2011: 22%
- 1855-1900: 45.2%
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.