The shortest recession

The recent announcement by a National Bureau of Economic Research panel that last year’s recession lasted a mere two months is another reminder postwar recessions tend to have short durations.

The NBER’s Business Cycle Dating Committee announced July 19 “a trough in monthly economic activity occurred in the US economy in April 2020. The previous peak in economic activity occurred in February 2020. The recession lasted two months, which makes it the shortest US recession on record.”

The recession’s end has implications for Arkansas’ private sector and state government. One example: Arkansas’ monthly unemployment rate peaked at 10% in April 2020. Since then it has declined to 4.4%.

Founded in 1920, the NBER is a Cambridge, Mass.-based research organization whose scholars developed a U.S. business cycle chronology that dates to 1854. Chronology dates are occasionally argued but among economists, the NBER panel’s findings are widely accepted and akin to the umpire.

The announcement surprised those who define a recession as two consecutive quarters of negative growth. Relying on this definition, any recession would have to last at least six months. An NBER memo notes, “The financial press often states the definition of a recession as two consecutive quarters in decline in real GDP.” Yet the committee uses a broader set of coincident indicators: nonfarm payroll employment, industrial production, real personal income less transfer payments, and wholesale-retail sales.

These can be viewed online at the Federal Reserve Bank of St. Louis’ FRED site. It’s appeared for some time that industrial production and other coincident indicators peaked in 2Q-2020.

Finally, the panel also considers “the depth of the decline in economic activity.” Regarding last year’s recession, the panel concluded: “the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief.”

There are several takeaways from the U.S.’s shortest recession. First, U.S. recessions have evolved and are shorter in duration. Post-war, only three of 13 lasted more than one year. By contrast, 18 of 21 recessions prior to 1945 had durations of more than one year.

Second, fiscal and monetary policy are counter-cyclical in the short-run, though labor shortages and rising inflation suggest they are overdone at this point.

Finally, many of Arkansas’ public companies were founded in past recessions. It’s possible another was founded in 2020, though it might take years to emerge. Expansion, including jobs creation, is the natural state of the economy, though labor shortages are also evident in Arkansas. Historically, state surpluses grow in expansions, a process that will continue as the shortest recession disappears in the rear view mirror.

Editor’s note: Economist Greg Kaza is executive director of the Arkansas Policy Foundation, a nonprofit Little Rock think tank founded in 1995.