Recessions can cause tremendous pain, but these business cycle ebbs and flows are normal and many follow patterns that can reveal insights into future economic downturns.
“Recessions come around like the seasons of the year,” says Jonathan Slain, author of “Rock the Recession.” “We don’t know what will cause them, but we know there will be one.”
What Is a Recession?
A recession is often defined as two consecutive periods of gross domestic product decline, marking a period of consistent contraction of the economy.
The National Bureau of Economic Research is charged with monitoring business cycles and declaring an official recession using three criteria: depth, diffusion and duration. The NBER uses other measures, in addition to GDP, to determine if and when a recessionary period has occurred. These include personal income, personal consumption expenditures, wholesale retail sales and gross domestic product.
How Long Do Recessions Last?
The average recession in the U.S. lasted roughly 17 months.
The shortest official recession in U.S history lasted just two months in early 2020. The longest official recession in U.S. history lasted more than five years and occurred from 1873 to 1879, according to the NBER.
Review of Past U.S. Recessions
There have been roughly 17 recessions in the U.S. over the last century. These include the Gulf War Recession, the Dot-com Recession, the Great Recession and, most recently, the COVID-19 Recession.
Characteristics of recessions include high unemployment and a dip in household incomes. Sometimes, a recession may also coincide with a bear market — defined as a 20% decline in the stock market — but a stock market crash and a recession aren’t always related.
“Recessions are tough on the stock market historically,” says Scott Nations, president of Nations Indexes and author of “The Anxious Investor.” “The bigger problem for investors is that they tend to overreact to the concept of a recession. The best way to make money in the stock market is to invest, keep investing and don’t stop investing.”
Though each recession has its unique circumstances, some financial analysts have drawn comparisons between today’s economic environment and periods in the 1970s and 1980s marked by high inflation and international crises.
“Energy prices spiked in the early 1970s for geopolitical reasons and without any warning. In both situations, there was also a tremendous amount of political turmoil. And we’re also in a situation where stock market valuations — what people are willing to pay for the earnings stocks generate — have decreased,” Nations says. “And in both cases, interest rates were really screaming higher.”
[READ: What Causes Inflation?]
Historically, recessions have tended to have a strong psychological element as well as these external factors, Slain says.
“Most of our economy is driven by consumers. We as consumers start to lose confidence, we spend less,” he says. “Manufacturers begin to make less stuff because people aren’t buying as much as they were before. Then manufacturers have to fire people, they spend less, and it becomes a doom loop.”
From these historical recessions, consumers and investors can prepare themselves for future recessions. They can anticipate the recession’s duration as well as its likely characteristics and formulate a plan.
“As humans we are not good at making decisions when we are emotional,” Slain says. “Have a plan to know what to do in the next recession. Come up with metrics to decide when to hit the emergency break. For a consumer, it could be your level of household income.”
See a table of all recessions on record since the beginning of the 20th century, from NBER.
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How Long Do Recessions Last? What We Can Learn From Past Recessions originally appeared on usnews.com