Tags: carr | recession | economy

You’d Better Get Used to Extreme Swings in Volatility

By Michael Carr   |   Wednesday, 05 Oct 2011 09:32 AM

Before the Federal Reserve was active in managing the business cycle, the economy was almost equally split between expansion and contraction. Recessions were normal and accounted for about 45 percent of the time in economic history.

Since World War II ended, recessions have only accounted for about 15 percent of the time and lasted about half as long on average.

In recent years, money management firm Pimco has frequently referred to the “New Normal,” which would be characterized by slow growth and high unemployment. Implied in this scenario are more frequent recessions.

Recessions were a major feature of the “Old Normal.” From 1854 until 1919, there were 15 recessions and they lasted an average of 22 months with expansions lasting 27 months.

Since 1945, in an equal number of years, there have been 11 recessions, lasting an average of only 11 months while expansions averaged 59 months.

A number of economic forecasters are now certain that a recession is inevitable. If they are correct, then the recession has most likely started and it is actually time to start looking for the bottom.

This most recent economic expansion began in June 2009, about 27 months ago. If a new recession is occurring so close to the end of the last one, then we may be seeing a pattern that existed before the Fed briefly managed to gain control of the business cycle and we could expect to spend an almost equal amount of time in economic contraction and expansion.

With the New Normal starting to look a lot like the Old Normal, we can use history as a guide and expect more volatility in the economy, politics, and the markets for years to come.

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