Younger generations might not have to worry about recessions as much as their elders. It would be great news for their job security and stock portfolios.
AP Photo/Rick Bowmer
- Official NBER recession data says US recessions have become less common over time.
- But some economists have argued that flawed historical economic data puts this claim in question.
- A variety of factors should be making the US economy more recession-proof than it used to be.
One of the biggest questions of today's economy is when the US will enter a recession. And most Americans are crossing their fingers it won't happen anytime soon.
During recessions, many people lose their jobs — and those who don't are left worrying about whether they'll be next on the chopping block. Recessions often cause businesses to close and stock portfolios to plummet, and they can have a lingering impact on workers' employment and wages, even years after a downturn has officially ended — it took many millennials a long time to recover financially from the Great Recession.
So, over the last few years, when experts predicted that the US would soon enter a recession, many Americans worried about their financial security. While a downturn hasn't come yet — and some economic indicators remain strong — recession fears haven't gone away.
While it's unclear if the US will experience a recession in the near future, data from the National Bureau of Economic Research (NBER) — the private, nonprofit research group that's responsible for tracking the start and end dates of US recessions — shows a promising trend for Americans, in particular young people who are just beginning their careers: Recessions have become less common in the US.
Between 1990 and 2023, the US economy spent 36 months in a recession, with the most recent US recession in 2020 lasting two months. The NBER defines a recession as the period between a peak of economic activity and its lowest point — the period typically must include a "significant decline in economic activity" that lasts more than a few months.
Between 1960 and 1989, the economy spent 59 months in a recession. The further back you go — the NBER data goes to about 1850 — the more common recessions were.
But here's where things get a bit complicated.
The NBER's recession data between roughly 1850 and 1950 is somewhere between flawed and unusable, George Selgin, an economist and a senior fellow at the libertarian think tank the Cato Institute, told Business Insider. He said the NBER's pre-1914 recession data, in particular, is "very poor," and that only economic data collected after World War II is of good quality.
For example, while some efforts were made to track unemployment as early as the 1870s, the Bureau of Labor Statistics didn't officially do so until 1929.
This raises a series of questions: Are US recessions, in fact, much less common than they used to be? If so, who or what is responsible for this improvement?
And if not, what's gone wrong? After all, economists told BI that the US's diversifying economy and improving economic data should have made the US more resistant to recessions than perhaps ever before.
Recessions might not be less common
It's possible that NBER worked with subpar data but generally was able to identify when the US entered a recession.
However, Selgin said alternative analyses of historical economic data have found that the US hasn't seen much of a decline in recession frequency over time. Selgin pointed to a research paper published in 2005 by Joseph H. Davis, now the global chief economist at Vanguard, as the "most reliable" source of recession data he's seen.
Davis's research put more emphasis on economic output and employment and less on prices, which can tell a misleading story, Selgin said. For example, while prices fell during the late 1800s, this didn't mean there was necessarily a recession.
"What Davis and other economic historians have shown is that much of the deflation, not all of it during those times, was driven by productivity gains."
An Improved Annual Chronology of US Business Cycles since the 1790s (Joseph H. Davis, 2005)
Ultimately, Davis's research concluded that US recessions might not be as common historically as previously thought — casting doubt on the premise that recessions have become much less common over time.
While Davis's recession data only dates up to around 2000, Selgin said incorporating more recent data points, like the Great Recession, would only reinforce the paper's findings.
The US economy is more resilient because it has diversified
In some ways, the US economy is arguably more stable than it was 100 years ago. Agriculture's declining share of the economy is among the primary reasons. In 1935, there were about 6.8 million farms in the US, per the US Department of Agriculture. In 2023, there were 1.9 million.
"A bad harvest for one or two crops or a drought season, that could give you a big downturn," Selgin said. "That doesn't happen in a diversified manufacturing economy, of course, where much of the GDP has nothing to do with the weather."
The ongoing transition from a manufacturing economy to a services-oriented one could be making the US even more resilient, Satyam Panday, Chief US Economist, S&P Global Ratings, told Business Insider.
"The most volatile is agriculture, then manufacturing, and services is the most stable," he said of economies with a particular industry focus. "So the growing share of services also means you're going to have more stable economic growth."
Additionally, Selgin said that growing US government spending relative to GDP over the past century could also be making the economy more stable. In part, that's because government spending doesn't tend to plummet during difficult economic periods.
Becoming more energy-independent may have helped as well. Before 2018, when the US exported more oil than it imported for the first time in 75 years, a huge spike in oil prices outside the US could seriously impact the economy, Panday said. Today, the US should be more insulated from such a price shock.
But if recessions aren't much less common than they used to be, and the aforementioned developments should be making the economy more stable, where would the instability be coming from?
Selgin isn't sure what the explanation is, but he thinks it's possible that the Federal Reserve, which was founded in 1913, could be partly responsible.
"The Fed tends to overdo things sometimes, and others, it underdoes things, even though, in general, it's getting the directions right," he said of the central bank's interest rate policies. "There's plenty of reason to not be complacent about the Fed's performance, to wonder whether it has really done what it set out to do when it was established."
The Fed is tasked with helping the economy maintain maximum employment and stable prices. Since 2022, the Fed has raised interest rates in an effort to bring down inflation, and it's pursuing the desired "soft landing" of lower prices and a healthy labor market. Its policies may have helped the US avoid a recession.
Panday said he believes that better economic data and the ability to "learn from the mistakes of the past" have helped the Fed make better decisions.
Avoiding recessions isn't the only indicator of a healthy economy
The longer the US economy grows without a recession, the better it is for employment and Americans' standard of living, Panday said. But when it comes to measuring the stability of the US economy, measuring the frequency of recessions might not be the best approach.
Even when a recession technically comes to an end, and the US economy begins to grow again, that doesn't mean everything is fine and dandy. For example, the US exited a recession in 2009, but employment didn't return to pre-recession levels until 2014.
It's why economists should focus not only on the frequency of recessions but on the pace of the economic recoveries in the aftermath, Selgin said.
Panday said he thinks policymakers' response to the pandemic recession — which included trillions in federal COVID-19 spending — shows that they may have learned the lesson from the sluggish recovery after the Great Recession.
To be sure, while a stable economy has its benefits, it's not the only indicator of a healthy economy. For example, Americans' standard of living has improved considerably over the past century thanks in part to a growing economy and technological progress, even though they've dealt with the occasional recession.
In the years and decades ahead, any number of factors could plunge the US into a downturn.
A long economic expansion could raise the risk of the economy "running too hot," Panday said — which could ultimately lay the groundwork for a recession if policymakers don't respond correctly. He added that the growth of the financial sector relative to the rest of the economy could pose risks if it's not properly regulated. And of course, unexpected global shocks to supply and demand — the pandemic being the most recent example — could wreak havoc.
To some Americans, the next recession might feel inevitable. But Panday said that isn't necessarily true.
"Economic expansions don't die of old age just because of time," he said. "Even if it's been going on for a long time, it doesn't mean that you're going to get a recession."
Have you changed your spending or savings strategies over the past few years because you feared a recession was on the horizon? If so, reach out to this reporter at jzinkula@businessinsider.com.
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