(Over)reacting to Economic Recessions
Updated: Apr 20, 2020
We are all seeing or hearing news and statistics every day warning us about how the Coronavirus from Wuhan, China will impact the economy and our lives – mostly negative. I’m finding it difficult to keep my mind from dwelling on the negative and worrying about my / our future.
I told a client of mine last week that “I’ve been through a few of these (recessions) already as a business owner. I am confident that you and I will come out OK.” This prompted me to do a little digging and comparison of our most recent recessions. If you are a “read the last page first” type of person, here’s the bottom line: We can be calm and optimistic about the future. History demonstrates that the down cycles within our economy are real. And so is recovery.
Some of us “seasoned” workers have been through at least three economic recessions during our professional careers. The National Bureau of Economic Research defines a recession as "a significant decline in economic activity spread across the economy, lasting more than two quarters which is 6 months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales.” Let’s recap those recessions that have occurred in the past 50 years (those that anyone 70 years old and younger experienced during their working careers):
1973-1975 – Remember waiting in line at the gas station? OPEC quadrupled oil prices and the stock market crash (triggered by the end of the Bretton Woods system of monetary exchange between countries) led to stagflation – high inflation, low economic growth, and high unemployment. Coupled with the recent impeachment of President Nixon, our country was in a panic about what the future held for us. Inflation was 12.3% in 1975 and interest rates were 7.85%. (Wouldn’t you like to have your investments in an interest-bearing account at that rate today?)
1980, and ‘81-82 (the “double-dip”) – Separated by only 12 months, with unemployment rates staying relatively high, some believe that these events are one-in-the same with no “real” recovery after the first. Factors during this time were the Iranian Revolution (remember the hostage crisis?), the 1979 energy crisis, and the US attempt to get a handle on inflation. Incidentally, unemployment hit an all-time high at 10.8% in October 1982.
1990-1991 – Prior to March 2020, “Black Monday” (the crash on October 19, 1987) was the largest one-day percentage drop in Dow Jones history. Computerized trading seemed to lend to the exceptional rate at which the market dropped. The DJIA “recovered” within two years and was back above its high position of 2,247 by September 1989. Interest rates remained high and the recovery occurred just in time for “Black Friday” or the “mini-crash” on October 13, 1989. Some believe this was triggered by the failed buyout of UAL Corporation (parent of United Airlines). Other factors (rising inflation and interest rates, debt accumulation and the oil price shock in 1990) all led to the 16-month recession.
2001 – Remember Y2K? In the prime of 10 years of solid growth, the world was all abuzz about the impending failure of electronic devices – leading to the inevitable collapse of our financial systems. Credit card readers, ATMs, POS, banking systems and financial trading would (supposedly) all come to a screeching halt at 12:00AM January 1, 2000, as well as all computers and industrial controllers. This (inaccurately predicted) looming crisis led to low employment rates in the late 1990s as anyone and everyone with any technical capability was put to task to defeat the 99-to-00 year/date issue. The release of all the no-longer-needed technical staff, along with the burst of the speculative dot-com bubble, economic “reset” was inevitable. Still, this recession was relatively short (8 months) and GDP declined only 0.3%.
2007-2009 – The Great Recession. Six years later, the subprime mortgage crisis led to the collapse of the financial markets around the world – the Global Financial Crisis (GFC). Large global financial institutions failed due to being vastly over-leveraged. This was the first time in history that all major global stock markets synchronously dropped – a very deep and rapid drop. The Dow Jones hit the low in March 2009. It “recovered” to its August 2008 high within two years. We’ve been experiencing a season of strong growth ever since. Well, until this past month.
While this is an interesting stroll through economic history that has conjured up some memories, the reason for this is to bring context to the following observations, and hopefully help you maintain a positive perspective:
Those who are around 70 years old or older experienced all five of these recessions during their career, assuming a career starts at the post-college age of 22.
About half of the business owners in the US are under the age of 50. This demographic has only experienced, at most, the previous two recessions (the Dot-com bubble, and the GFC) in their careers.
Further, about 16% of small business owners are under the age of 35 and have only experienced The Great Recession – and this was early in their career, perhaps prior to them owning their businesses.
Of these previous five recessions, the Dow Jones “recovered” an average of 115% within five years after it bottomed out. The greatest Dow recovery occurred after the 1982 recession: hitting 239% above the low in 1982.
In every case of these recessions, the trigger was not related to the global-health of mankind. Oil prices, leveraged corporate buyouts, politics, conflicts between governments, economic agreements, long-standing bear markets in need of correction, or over-leveraged banking systems are not the reason we are in the crisis we have today. In fact, our banking system is the strongest its ever been. Unemployment has been at all-time lows for months. The stock market and the economy has been very healthy for over a decade. We have been experiencing growth for 120+ months.
Here’s the point: We can be calm and optimistic about the future. History demonstrates that the down cycles within our economy are real. And so is recovery. The past five recessions have occurred on average about every eight years. And here we are, 10 years after the close of our “Great Recession” hitting yet another season of unknowns. Here’s what we do know: we will experience growth, and we will experience decline. If you weren’t expecting something like this to happen to our economy, well, here’s a warning: Be on the lookout starting around the 2026 / 2027 timeframe.
And although this crisis and likely recession is totally different from anything we’ve experienced before – so was every other recession. The housing crisis, the dot-com bubble, oil prices quadrupling, a double-dip and new high for unemployment, high-speed computerized trading, failure and collapse of the world’s greatest financial institutions, all were unlike anything experienced before in history.
Let’s not lose sight of the reality that COVID-19 is unique and has the potential to create significant loss of life along with financial loss. At the same time, let’s not lose sight of the big picture – recovery will occur, and the bigger force than any disease: the one and only true God. Throughout history, humanity has turned to God and He has responded. He provides us peace, strength, wisdom and courage to endure. We can even find joy in our day-to-day trials because of the grace offered through His son, Jesus Christ. I do not subscribe to the view/belief that this crisis is caused by God as judgment on sinful man. I do, however, believe that we will all be closer to Him because of it. Jesus already paid the price for sin and we are merely experiencing life on a broken planet called Earth. Join me and turn to God for your comfort, inspiration and joy. We will make it through.