Since the COVID-19 pandemic’s onset in March 2020, our economy, capital markets, human psychology, health care concerns, educational approach, work habits, and myriad other aspects of the world’s wealth, economic, and societal engine have been challenged in ways nobody could have predicted. Conventional wisdom has been challenged on every level around the world and now we find ourselves with many unknowns.
At the heart of any discussion about 2023 is a debate about whether a recession is coming and, if so, how severe or benign it will be. Since we are not in the handicapping business, all we can do is use history as a road map to compare past recessions to today.
In this series of articles, we examine past recessions and the qualitative and quantitative factors that created and fed each one.
Many question the true definition of a recession and whether the proverbial “light bulb” goes on and off to tell us when they begin and end. We hope to provide an easy-to-understand perspective on how recessions have impacted economic and market conditions in the past and how lessons can be gleaned to be more successful investors—regardless of the severity of any recession.
The longest recession we’ve experienced was the Great Depression, which lasted for three years and seven months. The most recent recession was the shortest, the COVID-19 recession, which lasted only two months.
The before, during, and after of each recession brings a unique set of circumstances. Therefore, one cannot assume that what worked in the past will work in the future. Inflation, interest rates, market valuations, fiscal policy, and monetary policy all contribute to how various asset classes will behave during these challenging times.
With a better understanding of past environments, we can educate ourselves on how to better navigate future recessions and properly allocate capital.
DEFINING A RECESSION
Let us start with a few definitions. What is a recession? Most people believe that a recession occurs when the GDP growth rate is negative for two consecutive quarters. Actually, the National Bureau of Economic Research (NBER) has the responsibility of determining when a recession begins and ends. NBER defines a recession as “a significant decline in economic activity spread across the economy lasting more than a few months.”
The most important indicator of a recession is “real GDP.” It’s called “real” because it’s adjusted for the effects of inflation. When the real GDP growth rate first turns negative, it could potentially signal a recession, but sometimes it can turn positive in the next quarter. Additionally, it’s not uncommon to see GDP estimates revised in the following report, so it’s difficult to determine whether we are in a recession based solely on GDP. That is why NBER measures various monthly factors in addition to measuring real GDP growth rate—these statistics give a timelier estimate of economic growth:
- Real income measures personal income adjusted for inflation. When real income declines, so do consumer purchases and demand.
- Employment rate and real income together inform us on the overall health of the economy.
- Manufacturing sector’s health is another factor, as measured by the Industrial Production Report.
- Retail sales, adjusted for inflation, tell us how firms are responding to consumer demand.
RECESSIONS THROUGH HISTORY
To understand how to navigate future recessions, we need historical context of past recessions. Let’s start with a few key statistics on recessions in the United States:
- Since 1854, the U.S. has seen 34 recessions.
- Since 1929, there have been 15 recessions; however, there have only been five recessions since 1980.
- The average duration of the 15 most recent recessions is 12 months—the longest being the Great Depression (43 months) and the shortest being the COVID-19 recession (two months).
The 15 most recent recessions in the U.S.
| Name | Dates | Duration |
| Great Depression | August 1929–March 1933 | 43 months |
| Recession of 1937–1938 | June 1938 | 13 months |
| Recession of 1945 | February 1945–October 1945 | 8 months |
| Recession of 1949 | November 1948–October 1949 | 11 months |
| Recession of 1953 | July 1953–May 1954 | 10 months |
| Recession of 1958 | August 1957–April 1958 | 8 months |
| Recession of 1960–1961 | April 1960–February 1961 | 10 months |
| Recession of 1969–1970 | December 1969–November 1970 | 11 months |
| 1973–1975 recession | November 1973–March 1975 | 16 months |
| 1980 recession | January 1980–July 1980 | 6 months |
| 1981–1982 recession | July 1981–November 1982 | 16 months |
| Early 1990s recession | July 1990–March 1991 | 8 months |
| Early 2000s recession | March 2001–November 2001 | 8 months |
| Great Recession | December 2007–June 2009 | 18 months |
| COVID-19 recession | February 2020–April 2020 | 2 months |
Source: Oppenheimer Asset Management
Among all of these recessions, a few are especially notable.
AUGUST 1929 = MARCH 1933: THE GREAT DEPRESSION
- The biggest economic crisis in U.S. history.
- The unemployment rate reached 24.9% in 1933.
- Several factors combined to create the Great Depression. The Fed raised interest rates in spring 1928 and continued despite the recession, while the 1929 stock market crash destroyed businesses and life savings.
- The New Deal ended the Great Depression, boosting growth by 10.8%.
NOVEMBER 1948–OCTOBER 1949: POST-WAR CONSUMER SPENDING SLOWS
- When wartime rations were lifted after WWII, American consumers rushed to catch up. From 1945 to 1949, American households bought 20 million refrigerators, 21 million cars, and 6 million stoves.
- When consumer spending began to level off in 1948, it triggered a “mild” 11-month recession in which GDP shrunk by only 2%. However, unemployment was up considerably: At its peak, unemployment reached 7.9% in October 1949.
APRIL 1960–FEBRUARY 1961: THE RECESSION THAT COST NIXON AN ELECTION
- Richard Nixon was vice president when the nation sunk into another recession. Nixon blamed the economic slump for his loss to John F. Kennedy in the 1960 presidential election.
- There were two major causes of this 10-month recession, during which GDP declined 2.4% and unemployment reached nearly 7%.
- The first was what economists call a “rolling adjustment” in several major industries, the most notable being automobiles—consumers started buying more compact foreign cars and U.S. car makers had to slash inventory, reducing profits.
- The second cause was the Fed, which raised interest rates fast on the heels of the previous recession in an ongoing effort to rein in inflation.
- President Kennedy took credit for ending this recession with a round of stimulus spending in 1961 as well as expansion of Social Security and unemployment benefits.
NOVEMBER 1973–MARCH 1975: THE OIL EMBARGO
- This recession marked the longest economic slump since the Great Depression and was caused by a series of bad economic news.
- First, there was the Oil Embargo of 1973, imposed by the Organization of the Petroleum Exporting Countries (OPEC). With the oil supply restricted, gas prices soared and Americans cut spending elsewhere.
- Second, President Nixon tried to reduce inflation by instituting price and wage freezes in major U.S. industries. Unfortunately, many companies were forced to lay off workers.
- The result was “stagflation,” low growth with high inflation, and a recession that spanned five consecutive negative-growth quarters. In all, the 16-month recession saw a 3.4% reduction in GDP and a near doubling of the unemployment rate to 8.8%.
- The Fed had no choice but to lower interest rates to end the recession, but that set the stage for the truly runaway inflation of the late 1970s.
JULY 1981–NOVEMBER 1982: DOUBLE-DIP RECESSION
- This more painful recession came close on the heels of the short 1980 recession, introducing Americans to the phrase “double-dip recession.”
- For the third time in a decade, one of the recessionary triggers was an oil crisis. The Iranian Revolution was over, but the new regime continued to export oil inconsistently and at lower levels, keeping gas prices high.
- At the same time, the Fed’s timid interest-rates hikes in 1980 weren’t enough to slow inflation, so Fed Chair Paul Volcker pushed interest rates to new heights—21.5% in 1982! The sky-high rate pulled inflation down, but took its toll on the economy, which shrunk by 3.6% during the 16-month recession and saw unemployment peak at over 10%.
- This long and deep recession finally ended following a combination of tax cuts and defense spending under President Reagan.
JULY 1990–MARCH 1991: S&L CRISIS AND GULF WAR RECESSION
- Several factors led to the economic slowdown of the early 1990s.
- One was the failure of thousands of savings & loan institutions in the late 1980s, which hit the mortgage lending market particularly hard. Fewer mortgages meant record low levels of new construction.
- Meanwhile, Saddam Hussein, president of Iraq, invaded neighboring Kuwait, a major oil producer. The resulting Gulf War caused oil prices to spike. Adding to the economic woes was the October 1989 “mini-crash” of the stock market.
- The result was an eight-month recession that saw GDP decline by 1.5% and unemployment peak at 6.8%.
MARCH–NOVEMBER 2001: THE DOT-COM CRASH AND 9/11
- “Irrational exuberance” is blamed for the stock market bubble that formed around internet startups in the late 1990s and early 2000s. Investors pumped money into unproven businesses, artificially inflating their values to unsustainable levels. When the dot-com bubble finally burst in 2001, the tech-heavy NASDAQ lost 75% of its value and many investors went belly up.
- While the tech sector took a significant hit, the rest of the economy stumbled along until the September 11 terrorist attacks knocked it down.
- Given how much the dot-com crash impacted a generation of investors, the 2001 recession was relatively fast and shallow, with GDP down only 0.3% overall and unemployment peaking at 5.5%.
- The economy was able to pull out of the 2001 recession on the strength of the housing sector, which experienced growth even during the recession thanks to low interest rates.
DECEMBER 2007–JUNE 2009: THE GREAT RECESSION
- The longest and most severe economic downturn since the Great Depression, the Great Recession was part of a global financial meltdown triggered by the collapse of the U.S. housing bubble.
- The Great Recession was the result of a “financial house of cards” built on the subprime mortgage market. Large financial institutions invested heavily in mortgage-backed securities. When homeowners defaulted on those high-risk mortgages, not only did they lose their homes, but huge investment banks like Bear Stearns and Lehman Brothers collapsed.
- The dual housing-banking crises sent shockwaves through the stock market, and major indices like the S&P 500 and Dow Jones Industrial Average lost about half of their value.
- During the painful 18-month recession, unemployment reached as high as 10% and GDP shrunk by 4.3%. The economy only turned around after massive government stimulus spending (around $1.5 trillion) to prop up failing banks and inject capital into the struggling economy.
FEBRUARY–APRIL 2020: THE COVID-19 RECESSION
- This recession was highly unusual in terms how fast everything happened—both the recession and the subsequent recovery.
- When the global COVID-19 pandemic led to lockdowns, closings, and an overall decline in consumer activity, a sharp economic slowdown followed.
- Every advanced economy in the world entered into crisis. By April 2020, the U.S. economy had lost a massive number of jobs (20.5 million) , sending the unemployment rate skyrocketing to 14.7%.
- The GDP then plunged 31.2% in the second quarter of 2020.
- Fortunately, the recession was short-lived. The government approved nearly $6 trillion in pandemic relief, while the Federal Reserve slashed the interest rate to nearly zero—therefore, the recession officially lasted only two months.
Next, in Part II of this 3-part series, we will examine recessions in the context of the overall economic cycle. In doing so, we can identify performance patterns of various asset classes throughout the phases of the economic cycle.
Brian Werdesheim is a founding member of The Summa Group of Oppenheimer & Co. Inc (“Oppenheimer”), a private client financial advisory team that provides wealth management services.
