Shortest Recession In History Sets Up Next Recession

It’s now official that the recession of 2020 was the shortest in history. 

According to the National Bureau of Economic Research, the contraction lasted just two months, from February 2020 to April 2020. However, during those two months, the economy fell by 31.4% (GDP), and the financial markets plunged by 33%. Both of those declines, as shown in the table below, are within historical norms.

(Click on image to enlarge)

Shortest Recession In History, #MacroView: Shortest Recession In History Sets Up Next Recession

Here it is graphically. The chart shows the historical length of each recession and the corresponding market decline.

(Click on image to enlarge)

Shortest Recession In History, #MacroView: Shortest Recession In History Sets Up Next Recession

However, while the effects of the “recession” were all within historical norms, the recession itself was not. 

Let me explain.

A Non-Standard Recession

The statement from the NBER is as follows:

“In determining that a trough occurred in April 2020, the committee DID NOT conclude that the economy has returned to operating at normal capacity. The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession associated with the February 2020 peak. The basis for this decision was the length and strength of the recovery to date.”

As I said, the recession was non-standard. Conventionally, the NBER defines a recession as two consecutive quarters of negative GDP growth. Notably, while the recession did technically meet the criteria after GDP fell 5% in Q1, recessions tend to last more than three months historically.

The difference was the massive interventions of 20% of GDP beginning in Q2, which created an “artificial growth surge” in the economy by pulling forward consumptive activity. That led to an explosive recovery in GDP in Q3 of nearly 30%.

(Click on image to enlarge)

Shortest Recession In History, #MacroView: Shortest Recession In History Sets Up Next Recession

It is essential to note that the NBER stated that any subsequent downturn would get labeled as a “new” recession. That view accounts for the recovery driven by massive interventions even though that growth is not sustainable.

As such, the “next recession” may not be as far off as many currently expect.

 

Why Recessions Are Important

Our discussion must begin with a basic concept: “recessions” are not a “bad thing.” 

It is a given you should never mention the “R” word. People immediately assume you mean the end of the world: death, disaster, and destruction. But, unfortunately, the Federal Reserve and the Government also believe recessions “are bad.” As such, they have gone to great lengths to avoid them.

However, what if “recessions are a good thing,” and we just let them happen?

“What about all the poor people that would lose their jobs? The companies that would go out of business? It is terrible to think such a thing could be good.”

Sometimes destruction is a “healthy” thing, and there are many examples we can look to, such as “forest fires.”

Wildfires, like recessions, are a natural part of the environment. They are nature’s way of clearing out the dead litter on forest floors, allowing essential nutrients to return to the soil. As the soil enrichens, it enables a new healthy beginning for plants and animals. Fires also play an essential role in the reproduction of some plants.

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