Economists know a lot about recessions. We know things that influence them, the dynamics of how they develop, what affects how they evolve, and hundreds of different ways to analyze and quantify them.
But we still can’t predict them. And, for all practical purposes, we can’t say definitively what “causes” them.
Recession are kind of like earthquakes. Seismologists and geologists understand a lot about earthquakes. But they still can’t predict them.
You’ll hear some “experts” saying that they know exactly what causes recessions. They might think they know, and even believe they know. But they don’t know. Not well enough to be able to predict them, anyhow.
And you’ll read that Person X predicted the last recession, with the implication that Person X really knows everything there is to know about recessions and economics, so you should always listen to Person X.
I don’t buy that. I don’t put much stock in people who claim to have “predicted” such and such economic event. For one thing, if you predict a recession enough times, you’re going to be right eventually. People predict recessions all the time – a “the sky is falling” financial crisis book comes out roughly every 3.9 minutes. Eventually there’s always a crisis, and the authors claim to have predicted it. Only they’ll conveniently forget about the 27 false alarms they had before they finally got it right.
Part of the problem is that economies are just too complicated for people to be able to predict much about them very accurately. Far too many unpredictably things affect economies. Weather. Revolutions. Politics. Elections. Wars. Politicians. Dictators. Terrorism. The individual choices and decisions of 7+ billion consumers. There’s just no way to take all those things into account and come up with useful and reliable predictions.
Yes, we can forecast, but it’s basically trying to quantify chaos theory. The best anyone can do is maybe come up with probabilities of certain outcomes. And even those will be iffy.
About the only prognosticator I give much credence to is Warren Buffett. And even he admits that he makes mistakes.
So the next time someone tells you that you have to believe what Person X says because he/she predicted Y, ignore it. If someone manages to predict three recessions in a row without any false alarms, they’ll have my attention.
So what is a recession, anyhow?
The textbook rule-of-thumb definition is two or more consecutive quarters of negative real GDP growth. In other words, whenever an economy shrinks for 6 months.
In truth, it’s more complicated than that, as reality often is. For reasons that are still imperfectly understood, economies tend to move in an up-and-down cycle. They grow for about 2 to 10 years, and then shrink for about 6 to 24 months. The periods of growth are called expansions, and the periods of shrinkage are called recessions.
The two-quarters-of-negative-real-growth rule usually is close enough for government work. But not always. What if an economy shrinks substantially one quarter, grows 0.1 percent the next, and then shrinks some more the next? By the rule of thumb, there’s been no recession, but that’s cold comfort to the people who lost their jobs. And that sort of thing does happen.
To sort this stuff out, the U.S. National Bureau of Economic Research (NBER) actually has a committee of some of the best brains in macroeconomics. In true economist fashion, it’s creatively called the Business Cycle Dating Committee. They meet whenever they see the need to pore over reams of data and decide when the most recent business cycle began and ended. In the process, they’re deciding when the expansion and recession were.
So here’s the actual NBER definition:
A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.
So a recession is “a significant decline in economic activity spreads across the economy and can last from a few months to more than a year”. In other words, an econquake.
As a public service, I’m including the NBER’s dates of all U.S. business cycles since 1854.
One of the few things economists are absolutely certain about is that business cycles happen. We don’t know exactly why, and we can’t predict them all that well. But they do. Over and over people have claimed that we’ve beaten the business cycle, that there won’t be any more recessions. And over and over, they’ve been proven wrong.
If someone tells you that there’s no more business cycle, they’re trying to sell you something.
Yeah, yeah, economists are dismal scientists. We’re always predicting gloom and doom. But unfortunately we’re always right about that. Eventually, anyhow.
So when I read that Australia hasn’t had a recession in 21 years, I was suspicious. That was something I had to check out.
So I looked at the data. And sure enough, it’s true. By the textbook definition, Australia hasn’t had a recession since 1991. They’re not even having one now. The U.S. had recessions from March to November 2001, and from December 2007 through June 2009. But Australia’s economy kept growing, if somewhat more slowly.
So how did Australia avoid the Great Recession and the recession(s) before? What’s Australia’s secret? Have they found that Holy Economic Grail, the key to overcoming the business cycle?
That I seriously doubt. But answer that “how” question will probably decades to answer; economists are still debating the Great Depression, and that was 80 years ago.
And in true dismal scientist fashion, I’d like to point out Australia did have at least two slowdowns during those 21 years. They just weren’t severe enough to amount to “negative growth”.
Either way, it bears looking into. I’ll try and give it a shot in a future post.