A Historical Look at Recessions
A Historical Look at Recessions

A Historical Look at Recessions



Kevin Rice
Kevin Rice
Senior Investment Strategist
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A Historical Look at Recessions

Key Contributors to Past Recessions


With the economy now back at full employment and the expansion already the third longest in U.S. history, investors have begun to look ahead to the next recession. Historically, U.S. recessions have occurred about once every five years, according to the National Bureau of Economic Research (NBER). Therefore, the most immediate question is whether a recession is likely to occur soon. Our answer is that while the risk has risen, a recession is not imminent.

We believe it is important to analyze the contributors of past recessions to see if they should concern us today. In this paper, we look at studies done by Goldman Sachs and the International Monetary Fund (IMF) that identified the key contributors to past recessions.

What is a Recession?

The NBER defines an economic recession as a significant decline in economic activity lasting more than a few months, and normally visible in gross domestic product (GDP). The U.S. GDP is the market value of all goods and services produced within the U.S. in a given period and is one of the most closely watched economic statistics.

A Historical Look at the Causes of Recessions

A study done by Goldman Sachs in January 2019 identified the key causes to the 18 U.S. recessions over the last 100 years. They classified the five major causes since World War I as: (1) industrial sector shocks and inventory imbalances; (2) oil supply shocks that reduce income and generate inflationary pressures; (3) sharp increases in inflation that leads to the Federal Reserve increasing interest rates; (4) financial imbalances and asset prices crashes; and (5) fiscal tightening (Exhibit 1).

Exhibit 1 Source: TC Wealth Partners, Goldman Sachs

A similar study done by the International Monetary Fund (IMF) analyzed recessions in 122 advanced economies since 1960 and identified four of the same contributors as Goldman, but it also found that external demand shocks have been a key contributor to past recessions (Exhibit 2). Demand shocks occur when there is a sudden and considerable shift in the patterns of private spending, either in the form of consumer spending from consumers or investment spending from businesses. Exhibit 2 Source: TC Wealth Partners, IMF

How Recession Risks have Changed?

To analyze how recession risks have changed we have to look at the amount of time the U.S. economy has spent in recessions and figure out how relevant historical drivers of recession are today. Many of the common contributors to recessions that we identified above do not worry us today.

U.S. Recessions

Over the course of history, the U.S. economy has spent a declining share of time in a recession. Between 1854 and 1945 the U.S. spent 42% of its time in a recession. After World War II through today the U.S. has only spent 14% of its time in a recession. This is because economic variables have declined in volatility since the mid-1980s (Exhibit 3). The classification of the causes of recession sheds light on the improvement of the economy’s cyclical performance. We will look at each classification in more detail below.

Exhibit 3 Source: TC Wealth Partners, Bloomberg, Goldman Sachs

• The Declining Cyclicality of U.S. Industry

Improved technologies and new supply-chain management techniques have reduced the volatility in the durable goods sector (ex. consumer electronics and automobiles) and have contributed the most to the decline in volatility of the U.S. GDP after the mid-1980s. The implementation of just-in-time management techniques and bar codes have enabled companies to more accurately forecast final demand and hold a lower volume of inventories, reducing production volatility.

Also, in the 1980’s production of many manufactured durable goods started to gravitate from the U.S. to countries like Mexico, China and Vietnam. By moving production of these products to other countries, the U.S. GDP has become less exposed to the cyclicality of those industries during a recession.

• Diminished Sensitivity to Oil Prices

In 1973, the OPEC embargo led to the first in a series of U.S. recessions in which oil prices spiked because of the reduction in international oil imports. Today the U.S. economy’s vulnerability to oil prices is much smaller. The rise of domestic energy production has reduced the impact that oil price fluctuations have on the economy. Today the U.S. can counteract any international slowdown in oil production by increasing the production of oil from U.S. shale. Production of U.S. shale currently makes up around 60% of total U.S. oil production (Exhibit 4).

Exhibit 4 Source: TC Wealth Partners, U.S. Energy Information Administration (EIA)

• Federal Reserve Policy and Inflation Targeting

In past decades, the decline in the unemployment rate generated an increase in inflation (Exhibit 5). High inflation tended to persist because the Federal Reserve (Fed) did not have an inflation rate target. As a result, persistent declines in the unemployment rate led inflation to increase, forcing the Fed to respond with aggressive rate hikes. The U.S. adopted a target range for inflation between 1.7% and 2% in 1995 and in 2012 former Fed chairman Ben Bernanke set a 2% target for the U.S. inflation rate. The targeting of inflation by the Fed has reduced the threat posed by any increase in inflation.

Exhibit 5 Source: TC Wealth Partners, Bloomberg

• Financial Risk

Credit crises and asset bubbles have been the main source of recession risk since 1990. Long periods of economic expansion can encourage the use of debt, which increases the financial risks in the economy and makes it more vulnerable to credit crunches. When looking at the one-year change in household and corporate debt as a percentage of GDP, we are in much better financial shape today than in previous times before recessions (Exhibit 6). Financial risks are still a moderate recession risk, but households and corporations have become more cautious since 2008 which has limited the accumulation of debt and are currently below the historical average.

Exhibit 6 Source: TC Wealth Partners, Bloomberg

• Fiscal Policy Tightening

Fiscal policy is the means by which the U.S. government adjusts its spending levels and tax rates to influence our nation’s economy. Major fiscal tightening (raising tax rates or cutting government spending) has historically occurred around large wars. In 1944, during World War II, government spending accounted for 55% of GDP. After the war the U.S. government tightened their fiscal policy and government spending accounted for only 16% of GDP. The last time the U.S. government tightened their fiscal policy was in 1969 when they tried to close the budget deficits of the Vietnam War. Since being elected, President Trump has implemented an expansionary fiscal policy and all current indications point to him not implementing any fiscal tightening.


A look back at 100 years of U.S. recessions suggests that several of the most important historical causes are less threatening today. We see the U.S. economy as less recession-prone than in the past even though global uncertainty continues to rise in response to trade wars and geopolitical instability. We believe that recession risks have risen, but a recession is not imminent. Next week we will share with you the indicators that we are watching closely to assess the risk of a recession and give you an update on what they are telling us.


  • Goldman Sachs, “The Next Recession: Lessons from History”, June 2017
  • Goldman Sachs, “Learning from a Century of U.S. Recessions”, January 2019
  • Goldman Sachs, “Can America’s Oldest Expansion Last Much Longer?”, July 2019
  • Vanguard, “Known unknowns: Uncertainty, volatility, and the odds of recession”, March 2019
  • Morgan Stanley, “The Recession Playbook”, July 2019
  • International Monetary Fund, “World Economic Outlook,” April 2009


Tags:  August 2019, Economic Recession, Federal Reserve Policy, Financial Risk, Fiscal Policy Tightening, Historical References, Inflation Targeting, Market Knowledge, Oil Prices, Recessions, TC on the Markets

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.