So, let’s examine the assumption, is there any relationship between the severity of a recession and the strength of the subsequent revival?
At last year’s Minsky conference, I showed that the conclusion we had first reached in the spring of 2009 had been vindicated. Meaning that the first year of recovery from the Great Recession was pretty much in line with historical experience, while, as for the rest of the expansion, the business cycle owed us nothing more.
Let’s look at the evidence.
This is a regression surface that supports the idea that the strength of the first year of revival depends on the depth of the recession, which is what Zarnowitz and Mussa meant, before their words were taken out of context.
The chart also shows something further. The strength of the first year of revivals has been declining over the decades. We use the analogy of a rubber ball that gradually loses its elasticity over the decades. Like that rubber ball, the economy still bounces back stronger in the initial period following deeper recessions, but with its elasticity gradually declining, the strength of the first year rebound is diminishing over time.
The chart shows two independent variables – the time elapsed since World War II (left horizontal axis) and the depth of recession (right horizontal axis). Here we use a broad measure of U.S. economic activity, which is ECRI’s U.S. Coincident Index, subsuming the aggregate measures of output, employment income and sales.
The dependent variable is USCI growth in the first year of economic recovery (vertical axis). The relationship among these variables is statistically significant and explains three-quarters of the variance in the strength of the recovery in the first year of recovery.
The regression surface slopes downward on the left side, showing that, as years pass, the rate of growth in the first year of expansion declines. The ball becomes less bouncy, so to speak.
The upward slope on the right side shows that, when recessions are deeper, you then see a stronger rebound in the first year of expansion.