Financial FitnessGeneral Information

Is A Downturn in the Economy Inevitable?

By March 5, 2020 No Comments

According to the National Bureau of Economic Research, as of February 2020, the United States is beginning its 128th consecutive month of an economic expansion.  This is the longest in our nation’s history based on records that go back to 1854.

A downturn in the economy is different than a recession.  According to Investopedia, a recession is a widespread economic decline that lasts for at least six months.  A recession is when the gross domestic product, or GDP, contracts for at least two quarters.  Since 1854, there have been a total of 33 recessions.

If we look back at the last recession that occurred in 2008 and 2009, there were certain things that triggered the recession.  Most all recessions have certain economic events that ultimately lead up to the recession.  It’s not consistent for every recession, but looking back, there are 8 causes of a recession that I found on the On Balance publication.

  1. A loss of confidence in investments. A Loss of confidence makes consumers stop buying and move into a defensive mode.
  2. Falling house prices and sales. As home owners lose equity, it forces a cutback in the spending as they can no longer borrow against their house.
  3. Manufacturing orders tend to slow down.
  1. Poor management. Bad business practices often can cause a recession.
  2. Wage price controls. Fortunately, this only happened once, and it was in 1971 under President Nixon, where he froze wages and prices to stop inflation.
  3. Post-war slowdown. The economy slowed down after the Korean War. This caused the 1953 recession.  Similar to reductions after World War II that caused the 1945 recession.
  4. A credit crunch. This occurred when Bear Stearns announced losses thanks to the collapse of its hedge funds that it had owned back in 2008. The funds were heavily invested in what were called collateralized debt obligations. When Moody’s, the rating company, downgraded its debt, banks which had similar invested positions panicked.  They stopped lending to each other and created a massive credit crunch.
  5. Asset bubble Bubbles occur when the price of an item, such as gold, stocks, or housing, is over-inflated. We saw this in the early 2000’s with technology and again in 2008 and 2009 with real estate.

Obviously, recessions don’t happen overnight but they occur over longer periods of times until ultimately they seem to appear out of nowhere.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All performance referenced is historical and is no guarantee of future results.