The Good, the Bad, and the Ugly of Recessions and Bear Markets
Some use the words “recession” and “bear market” interchangeably, but they are not the same. A recession is a slowdown in economic activity, characterized by decreases in GDP growth. A bear market is a decrease in the stock market of 10% or more over 2 quarters or more. A recession can and has happened without a bear market, but history shows that the wealth effect of a bear market, making investors poorer, slows down spending and leads to recession, so the two are closely related. Accordingly, we discuss both together in this article, and simply use the word “recession.” Recessions serve to re-set the economy. And are good in this sense, but if they go on too long, or are too deep, they can be bad, or even ugly.
Recessions are a natural part of the economic cycle, which expands and contracts. There have been 33 cycles in the US. ”Contractions” are recessions in the following table provided by the National Bureau of Economic Affairs .
According to Money Under 30, recessions are good for the economy because:
- People’s attitudes change (for the better)
- We see growth and innovation in underdeveloped sectors and shrinking of overcrowded, bloated sectors
- We have the opportunity for self-evaluation
Recessions shift our focus from consumption and good times to saving and frugality. So-called “Zombie companies” that were buoyed up by an expanding economy go out of business, setting the stage for the next expansion. Employees assess where their skills might best be utilized, and if they need to acquire new skills.
The severity of a recession can be measured by 3 factors:
- It’s length
- The decrease in GDP
- The unemployment rate
For details on these factors, please see “A Review of Past Recessions”. We define a “bad” recession as one that is typical, lasting about 15 months with a 2% decline in GDP and unemployment reaching 6%. Less severe recessions are deemed “good” and the more sever depressions are deemed “ugly.”
The worst recession in the US (and the world) was the Great Depression, summarized by Wikipedia as follows
The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States. The timing of the Great Depression varied across nations; in most countries, it started in 1929 and lasted until the late 1930s.
Time period: August 1929 – March 1933
Global GDP decline: -26.7%
Peak global unemployment: 24.9% (1933)
Some say that the 2007-2009 “Great Recession” in the US is comparable to the Great Depression, but as you can see in the following, it was much less severe, although it does fall into our “Ugly” definition:
Time period: December 2007 – June 2009
Global GDP decline: -5.1%
Peak global unemployment: 10% (Oct 2009)
Recessions are no fun, but they are a reality of economic cycles. They are unavoidable. We are currently witnessing attempts to avoid the next recession, but these attempts will eventually fail. No one can stop time. These attempts at deferring the inevitable could make the depth and length of next one “Bad” or even “Ugly.”