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A Case Study Of Recession In The Absence Of A Yield Curve Inversion: 1948

Hale Stewart profile picture
Hale Stewart

By New Deal Democrat

As readers know well by now, I am looking for metrics that can explain the onset of recessions in situations where the yield curve never inverts.

To recap, between the early 1930s and the mid 1950s, the yield curve never inverted and yet there were four recessions:

[Note that beginning in 1935, all Fed district banks were required to have the same discount rate, so the NY Fed rate was also the national rate.]

The recession that intrigues me the most is the recession of 1948. Unlike the recession of 1938, it does not appear to have anything to do with the sudden introduction of contractionary fiscal policy. Further, it is a situation where the Fed did little or nothing to chase inflation - in fact, the biggest inflation of all including the 1970s since World War 1:

In 1947, consumer inflation reached 20% YoY, and commodity inflation 35% YoY! The Fed did nothing until late in 1948; it raised rates from 1% to 1.5%.

In other words, it's hard to blame the 1948 recession on the Fed!

I have found a Fed study from 1954 discussing the 1948 recession in detail (warning: pdf).

The paper describes the recession as having mainly been an "inventory correction." Basically, at the end of World War 2, there was a huge (perhaps 15-year!) backlog in consumer demand. Production and consumption took off like rockets, but once the initial backlog was fulfilled, the pace of each declined. Because producers hadn't adjusted their production in advance, inventories built up, and in reaction, producers cut back production. [Note: This sequence still seems to be the same: sales lead inventories. It is the increase in inventories that gives producers the signal to cut back production.] The paper's line of argument is set forth below:

This article was written by

Hale Stewart profile picture
Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM in domestic and international taxation (MagnaCumLaude). He is the author of the book The Lifetime Income Security Solution. Follow me on Twitter at @originalbonddadYou can read his legal analysis on his law office's blog.

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Comments (2)

bbro profile picture
Manufacturing Employment to Total Employment....December 1948...31.3%

Manufacturing Employment to Total Employment....December 2018....8.5%
Salmo trutta profile picture
As David de los Angeles said, the Fed pegged interest rates back then, up until the Tresasury-Federal Reserve Accord of 1951.

But Hello, Hello, Anybody home, Think Marty McFly! Think!


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