Recession Rumors

by: S&P Dow Jones Indices

By David Blitzer

One sign that people are worried about a recession is getting questions about one on days the market rises. There seem to have been more down days than up days since the start of the year and the recession question is being asked more on all days.

The current recovery is weaker than other recent rebounds. The first chart compares the last several recoveries and expansions by indexing each one to 100 at the quarter of the pre-recession peak. The horizontal axis is the time dimension measured in quarters. The thick black line at the bottom is the current recovery. The low point took a bit longer to reach than some other recession/recovery cycles; the track is below all the other cycles shown on the chart.

To paraphrase Mark Twain, predicting recessions is quite difficult, especially about the future. One theory popular in the press is that as recoveries get older they get weaker and eventually collapse into the next recession. Though this may be an appealing analogy to nature, the statistics don't support it. Research, including a recent note published by the San Francisco Federal Reserve Bank, shows that since the end of the Second World War, there is no link between longevity and the timing of the next recession. Then there is the stock market, which Paul Samuelson noted successfully predicted nine of the last five recessions. Doubters can examine the second chart, which shows the S&P 500 and the recessions since 1947.

In fact, most recessions weren't even recognized until a few months after they began. At the moment, recession fears seem to be overdone - the unemployment rate is falling, weekly initial unemployment claims are far below any danger zone and consumers are busy buying houses and cars.

I will speak more on recessions and the outlook during my keynote at the upcoming CBOE Risk Management Conference.

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