Key Takeaways

• Since the Own Goal Recession of 1937-1938, the US has suffered 14 official recessions, making it the country with the highest number of recessions.
• Canada comes second with 11 recessions, excluding the Great Depression, since November 1937. Since 1970, recessions in Canada have occurred at the same time as recessions in the US.
• Since the end of the Great Depression, the UK has had eight recession periods from 1956 to 2020.

Introduction

United States of America

• Following the Great Depression, the US suffered 14 recessions between 1937 and 2021. The average length of its recessions is 10.4 months.
• The length of recessions in the US has fallen since the Gulf War recession of 1990-1991. However, the Great Recession of 2007-2009 took its toll and stretched over 18 months. The US has had only one recession since then, which lasted only two months.

 

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• Of all 14 recessions, the 2-month COVID-19 recession caused the highest unemployment rate in the US. Unemployment hit 14.7% in April 2020, up from 3.5% in February 2020.

 

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• By December 2021, the US had spent $5 trillion on pandemic relief, bringing the unemployment rate down to less than 4%.
• The V-Day Recession of February 1945-October 1945 caused the worst GDP decline. In the eight-month duration of the recession, the US GDP dropped by 10.9%.

 

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• All recessions listed in this report, excluding the COVID-19 recession, coincided with 14 bear markets in the US. The bear market refers to a “sustained drop of 20% or more from a market peak.”

 

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Canada

• Canada has suffered 11 recessions since 1937 and five since 1970, eight of which coincided with recessions in the US. Since 1970, recessions in both countries have happened around the same period, showing that both economies are “highly synchronized.”

• The average length of Canada's recessions is 10.2 months. The length of recessions in the country became shorter during the 1974 – 1975 recession. However, The 1990-1992 recession took its toll and spread over 27 months.
• Based on the classification system developed by the C.D. Howe Institute’s Business Cycle Council, the January 1980-June 1980 recession is the only Category 1 recession in Canada's history. It had only a “mild drop in GDP and no decline in quarterly employment.”

 

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• There was also a recession between 2014 and 2015 due to the oil price crash. This led to a 0.1% shrinkage in the country's GDP in the second quarter of 2015.

 

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• According to C.D. Howe, Canada also went into recession in 2020. As of March 2020, over a million jobs were lost.

 

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United Kingdom

• Between 1956 and 2020, the UK suffered eight recessions, the first of which was caused by rising inflation, high bank rates, and major political ructions.
• The average lifecycle of its recessions is 9.75 months. The longest of these are the recessions of the early 1980s, early 1990s, and the Great Recession.

 

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• The early 1980s recession, which lasted from 1980 to 1981, caused a five-quarter contraction in the country's GDP. In 1980, the economy contracted by 2%.
• The recession in the early 1990s raised the country's inflation rate to almost 10%. The UK also suffered rising unemployment and interest rates.

 

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• The COVID-19 pandemic caused its GDP to fall by 2.2% in the first quarter of 2020. Between April and June in the same year, it shrank further by 19.4%.

Libya

• Libya has the highest number of years spent in recession. It has posted the highest number of years of negative GDP growth since 1951.

 

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• Regarded as a failed state, Libya has had negative GDP growth for 27 of its 75 independent years.
• Since the fall of the Muammar Gaddafi regime, the country has been in constant conflict. The war has caused the nation 783.2 billion Libyan dinars from 2011 to 2021.
• In 2020, according to IMF estimates, the country's GDP shrank by 66.7%. The economy has since shown signs of recovery.

 

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• Since the Great Recession of 2008-2009, Libya has had negative GDP growth in 2011, 2013, 2014, 2015, 2019, 2020, and 2021.

 

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• Based on the image above, the lifecycle of its recessions is getting longer.

Iraq

• Coming after Libya, Iraq has suffered 24 years of recession. Regarded as a failed state, Iraq has had negative GDP growth for 24 of its 64 independent years.
• It suffered one of its longest recessions between 2014 and 2016. Since recovering from the COVID-19 pandemic, the country has shown signs of recovery.
• Considering that the COVID-19 recession is one of its shortest in a while, the lifecycle of recessions in Iraq is getting shorter.

 

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Calculations

Research Strategy

Key Takeaways

• Since 1957, India has suffered five official recessions, many of which were caused by droughts and other agricultural factors.
• France has had five recessions since 1970, including the COVID-19 recession. The longest of these recessions is the Great Recession of 2008–2009, which lasted 15 months. 
• Between 1976 and 2020, Mexico suffered six recessions. The country escaped another recession when its economy stalled in the fourth quarter of 2021.

Introduction

India

• Following its independence from Britain, India has suffered five recessions with sizable contractions to its GDP, many of which were caused by agricultural factors.
• The length of recessions in India has fallen since the 1965-1967 recession, which lasted over two years. The average lifecycle of recessions in India is 1.2 years.
• Of all five recessions, the COVID-19 recession caused the highest real GDP contraction. GDP negative growth hit 7.3% in 2020-2021, a little lower than the projected 8%.

 

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• These are the GDP contractions for previous recessions;
• 1957-1958: 1.2%
• 1965-1966: 2.6%
• 1966-1967 0.1%
• 1972-1973: 0.6%
• 1979-1980: 5.2%

France

• France has suffered five recessions since 1974, the most recent of which ended in the second quarter of 2020.
• The longest of these recessions is the Great Recession of 2008–2009, which lasted five quarters, that is, 15 months, with a severity of 9.7 and a depth of -3.9%. 

 

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• The COVID-19 recession had the most lethal effect, with an 8% GDP contraction in 2020.

 

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• The average length of France's recessions is 10.8 months. The COVID-19 recession, which is the most recent, is the shortest so far. Therefore, the duration is getting shorter.

Mexico

• Mexico has had six recessions since the 1970s, including 1976, 1980s, 1994-1995, 2001-2003, the Great Recession of 2008, and the COVID-19 recession of 2020.
• It had its longest recession from 1980 to 1983. The 2001-2003 recession originated in the US and later spread to Mexico. Since then, the average duration of recessions has become shorter.

 

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• The latter has had fatal effects. In 2020, the country's economy suffered the “biggest annual contraction since the 1930s.” The pandemic caused an 8.5% contraction in Mexico's GDP.

 

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• Mexico escaped another recession when its economy stalled in the fourth quarter of 2021.

 

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• The average duration of recessions in Mexico is 2.17 years.

Argentina

• Argentina has spent 24 years in recession. Although the country has not experienced civil unrest recently, it is battling economic problems caused by overspending, inflation, debt-making, and bad fiscal policy.

 

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• This cycle of bad economic choices has led the country into numerous bouts of recession and a rising unemployment rate.

 

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• The recent COVID-19 recession is its longest so far, indicating that its recession lifecycle is getting longer. However, the country's economy is expected to recover over the next few years.
• 2021 marked Argentina's third consecutive year in recession. The country had entered the COVID-19 pandemic in crisis. In 2020, it lost 10% of its GDP.

Democratic Republic of Congo

• The Democratic Republic of Congo, one of Africa's least developed countries, has suffered 23 years of recession, many of which were caused by political unrest and crisis.

 

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• The country has seen an improved economic condition in recent times. In 2021, it successfully averted another recession and is projected to continue at a comfortable growth rate. 
• Its last recession is one of its longest. Therefore, its average recession lifecycle has gotten longer over time.

Calculations

Research Strategy

Key Takeaways

• The internet and economic data being "blown out of proportion" online could escalate an economic downturn, given that around 70% of the US GDP depends on consumer spending. Lynn Franco, Director of Economic Indicators at the Conference Board, adds, "If there’s a persistent drum beat of negative news, there’s a tendency of the consumer to react accordingly."
• One study found a positive correlation between Internet penetration and economic growth. The study analyzed data from 201 countries from 1988 to 2010 and found that a "10% increase in internet penetration rate raises real GDP per capita by 59 percentage points when the economy boosts and by 57 percentage points during the recession, respectively."
• The average recession lasts about 11 months, while the economic expansion period typically lasts 65 months.

Introduction

The Escalation and Duration of Recessions

• How long a recession lasts is determined by numerous factors. As noted by the Washington Post, "as hard as it is to forecast when a recession will occur, it’s harder still to envision what one will look like." In fact, using previous recessions to determine the outcomes of a new one may lead to flawed assumptions. According to The Economist, “The unusual nature of the deep covid-induced downturn in 2020, and the roaring recovery in 2021, when fiscal and monetary stimulus flooded the economy, limits the relevance of past episodes.”
• According to Arvind Krishnamurthy, Senior Fellow at the Stanford Institute for Economic Policy Research, recessions triggered by financial crises last longer than those resulting from non-financial causes, such as soaring oil prices. “It’s true that if you benchmark to a non-financial-crisis recession, the usual rule of thumb has been a V-shape — the deeper the recession, the faster the recovery,” says Krishnamurthy. "But if you benchmark yourself to financial-crisis recessions, you get a different outcome and slower recovery."
• The 2008 crisis is one example of a recession triggered by a financial crisis. The Great Recession followed the same patterns of earlier financial crises. The Stanford researcher found that in almost all previous recessions triggered by financial issues, the crisis "was preceded by a surge or bubble in easy credit — followed by big losses, a panicky reversal, and a credit crunch." Like similar recessions, it lasted longer than non-financial crises and has a slower recovery. Therefore, it is reasonable to assume the internet didn't significantly impact the recession's development compared to other factors.

• What followed the Great Recession was the longest expansion period in history. “Between 1945 and 2019, the end of the most recent business cycle, the average expansion has lasted about 65 months, and the average recession has lasted about 11 months. Between the 1850s and World War II, the average expansion lasted less than half as long (about 26 months), and the average recession lasted about twice as long (about 21 months). The 2009-2020 expansion was the longest on record at 128 months.”
• In 2008, the last long-term recession faced by Americans, the internet was relevant but not completely integrated into people’s lives as it is today. Social media was still growing. For example, the iPhone was released in 2007, while Facebook had only 100 million users worldwide.
• Meanwhile, the 2020 recession only lasted two months and was considered unusual by economists due to its nature and shocks to both supply and demand due to the lockdowns. Therefore, it was not possible to establish a quantitative connection between the internet and the escalation of the recession by comparing the Great Recession and the Pandemic with previous crises.

Consumer Behavior and Social Media

• The key factor most likely to be influenced by the internet is consumer behavior and confidence. If the internet accelerates the loss of consumer confidence, it will likely escalate and worsen the recession, as 70% of US GDP depends on consumer spending.
• With the internet, the economic data could be blown out of proportion and spread quickly. This could escalate an economic downturn, given that around 70% of the US GDP depends on consumer spending.
• When consumers worry about the future and the economy, they save more and lower their spending. "Changes in consumer or business confidence can impact aggregate demand. If individuals believe the economy will perform poorly in the future, they are likely to increase how much they save to prepare for lean times ahead. The associated decrease in spending would lower aggregate demand. Similarly, if businesses perceive that the economy is about to enter a recession, they are less likely to make investments in new machinery or factories because consumers would not be able to afford their new products during the recession." This creates a domino effect that might escalate the recession.
• "The COVID-19 public health crisis contributed to the March-April 2020 recession in this manner. Uncertainty surrounding the virus and the state of the economy combined with high unemployment levels resulted in decreased consumption and increased saving (as a percentage of income) on the part of consumers and decreased desire to increase capital investment on the part of firms."
• For now, consumers worry about the rising inflation and news about an impending recession, but their "spending remains resilient." Meanwhile, 80% of small business owners "are convinced the U.S. economy will enter a recession this year." The fear of the recession could escalate the situation rapidly, as some believe the same happened in 2008.
• When the yield curve inverted in August 2019, internet searches for "recession" increased five-fold. However, consumer and sentiment spending remained positive. By October, however, the manufacturing index had the lowest reading in a decade, and news outlets announced an imminent recession. For example, the CNBC app headline was “Breaking News—Dow drops 250 points continuing rough start to the fourth quarter amid recession fears.”
• According to a Fortune article published that year, as "more data was released, the story was clearly negative: ISM services at a three-year low; CEO confidence at a three-year low; jobless claims up three straight weeks; the weakest consumption numbers in six months." A couple of days later, the jobless numbers came out, showing stable numbers, and changing the narrative again. "The stock market should act the same way that it always has," adds Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance. "The process is the same. The question is, how does information get into people’s hands?"
• Philip Kassai, Chief Investment Officer at the Abraham & Abraham Family Office, explains the quick changes saying, "Like any virus, a recession starts in a confined place, and keeps on expanding unless there’s something to put it to rest," Kassai explains, "With social media, the dissemination of information happens so quickly it allows that viral element to take place."
• Personal finance author Eric Tyson echoes Kassai's statements, adding, "Social media provides an echo chamber and accelerates the spread of concerns and ideas (…) So you could imagine how quickly it might lead to a change in consumer confidence, spending, willingness to buy and hold stocks, etc.” Fortune also notes that economic data is often “blown out of proportion these days, at least in the short term."
• However, Robert Shiller, author of "Narrative Economics: How Stories Go Viral and Drive Major Economic Events," argues that while social media may be a new media form, human behavior remains the same. "Economic narratives creating recessions used to go viral even before computers, the same way diseases go viral, through direct person to person contact." Shiller adds that "applies to the tulip bulb craze in Holland—all the way back to the 1680s."
• Shiller believes that all recessions are at "least partly viral," but it is difficult to predict which narrative will become popular. "If the narrative is strong enough to generate a salient emotional response, it can produce a strong reaction, such as an instinctual fight-or-flight response," which may influence consumer behavior enough to slow down the economy.
• Lynn Franco, Director of Economic Indicators at the Conference Board, adds, "If there’s a persistent drum beat of negative news, there’s a tendency of the consumer to react accordingly." However, she also notes that consumers’ personal experience tends to overrule external information.

Additional Insights

•  Deflation is another problem that could be caused by the internet and information surrounding prices and products increasing the volatility of consumers' preferences and patterns.
• One study found a positive correlation between Internet penetration and economic growth. The study analyzed data from 201 countries from 1988 to 2010 and found that a “10% increase in internet penetration rate raises real GDP per capita by 59 percentage points when the economy boosts and by 57 percentage points during the recession, respectively.”
• More than the "stock market, consumer confidence or the index of leading economic indicators, an inverted yield curve has been a solid predictor of economic downturns. An inverted yield curve is when short-term government securities, such as the three-month Treasury bill, yield more than the 10-year Treasury bond. This indicates that bond traders expect weaker growth in the future. The U.S. curve has inverted before each recession in the past 50 years, with just one false signal."
• Anu Gaggar, global investment strategist for Commonwealth Financial Network, says that the "10-and-2 yield curve has inverted 28 times since 1900, and in 22 of those instances, a recession has followed." In the last 50 years, whenever the sum has gone negative, a recession followed.
 
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• It doesn't tend to be a fast predictor. For the past six recessions, the lag between the inversion and the recession has ranged from six months to three years. The median time is 18 months.
• Typically, the market peaks after the inversion (17 months), and then the recession follows a couple of months later (21 months on average after the inversion). As shown by the following chart, in 2020, the outcomes of the yield curve inversion were significantly faster than in previous recessions. According to MUFG Securities, the yield curve "inverted 422 days ahead of the 2001 recession, 571 days ahead of the 2007-to-2009 recession, and 163 days before the 2020 recession."
 
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• Some economists say that the yield curve inversion is no longer a reliable indicator due to Federal bond-buying patterns and low bond yields overseas. However, it is unclear if this factor would account for a significant difference.

Research Strategy

 

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Key Takeaways

• Morgan Stanley's CEO believes that the US is "unlikely at this stage to go into a deep or long recession."
• According to USA Today, the average length of a recession is 10.3 months, based on the twelve post-World War II recessions.
• Deloitte states that it is yet to be determined whether new technology could be translated into higher productivity growth to determine how the economy will be impacted ten, twenty, and fifty years in the future.

Introduction

Projected Duration of the Upcoming US Recession

• USA Today says that although there is no way of telling how long the upcoming recession could last, the twelve recessions since World War II lasted 10.3 months on average. However, the most recent recession was the shortest ever, lasting two months, from February to April 2020. Before that, the Great Recession lasted 18 months.
• Itay Goldstein, a finance professor at Wharton, states that it is difficult to predict how long the recession will last, but it will likely be long because the economic conditions are "very different from recent episodes when the government and the Fed could more easily take steps to shorten the recession." However, he noted that a strong labor market could positively impact recovery.

• Other experts seem to contradict that prediction. James Gorman, Morgan Stanley's CEO, believes that the US is "unlikely at this stage to go into a deep or long recession."
• According to a survey by Zillow, housing experts from academia, government, and the private sector think that there will be a short recession in 2024.
• An article published by Live Wire notes that while experts provide numerous predictions for the next recession, no one gives a clear estimation of how long it will last.

Other Forecasts Related to the Upcoming Recession

• According to the Financial Times, around 70% of academic economists it polled stated the US economy will enter a recession in 2023.
•  Deloitte also predicts that a recession will occur in late 2022 or 2023.
• The Economist says that in March 2022, the median forecast by members of the Fed’s rate-setting committee was that inflation would fall to close to 2% in 2024 without interest rates having to exceed 3%.

• Deloitte predicts a scenario where inflation continues in 2023, but a “growth recession” causes the unemployment rate to rise.

 

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Impact of Technology on the Projected Duration of the Recession - Helpful Findings

• Deloitte predicts a scenario where the COVID-19 pandemic will cause people to adopt new technology, which could lead to faster productivity growth and help the economy recover quicker.
• However, it also states that it is yet to be determined whether new technology could be translated into higher productivity growth to determine how the economy will be impacted ten, twenty, and fifty years in the future.
• While selected other sources predict that technology can aid economic recovery by making businesses more resilient, such as an article by SAP, they mostly come from tech companies, which raises questions about objectivity.
• For additional context and comparison with past recessions, in 2013, Brookings published an article, "Why Isn’t Disruptive Technology Lifting Us Out of the Recession?" The piece notes that the slow pace of recovery of advanced economies causes doubts around whether technology can truly foster growth.
• However, Brookings also predicts that as the emerging technologies become more mature, they will become a greater asset. Unfortunately, we found no reliable sources that update the information and sufficiently analyze technology's potential role in the upcoming crisis.

Research Strategy

Key Takeaways

• In 2009, 35 of 36 advanced economies and roughly half of EMDEs were in a recession.
• Selected emerging and developing economies, such as the East Asia and Pacific and South Asia regions, experienced continued expansion during the recent global recessions.
• In the most recent recessions, one of the key factors in driving the global downturn was a crisis in the country on which the global economy was dependent, including Germany, the US, and most recently, China.

Introduction

The Global Versus Regional Nature of Recessions

• Since 1870, there were 14 global recessions based on financial indicators such as GDP growth.
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• The figure doesn't fully correspond to the number of national recessions, based on the example of the US, where there have been 17 recessions in that period. However, the overall pattern is similar even for the 19th and 20th centuries.
• For context, while regional recessions are defined as negative GDP growth in two consecutive quarters, the global economy hasn't experienced negative GDP growth since World War II. However, sub-2% growth can be considered a global recession.
• The section below provides more information on how globalization changed the nature of recessions.

Recent Recession Patterns Related to Globalization

• Compared to the Great Depression of 1929, the Great Recession of 2008 saw steeper and more synchronized declines in trade across countries. Over 90% of OECD countries had experienced trade declines above 10% by the end of 2008. This “Great Synchronization” has been argued to be the “first crisis of globalization.”

 

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• However, it has not been attributed to the internationalization of supply chains since the declines in trade did not impact the structure of the supply chains. Rather, the globalization of uncertainty is thought to be the common factor linking global declines in trade.
• In consistency with the historical record, the 2009 global economic crisis led to recessions in many countries. The previous recessions that happened in advanced countries since the 1970s—“the mid-1970s, early 1980s, early 1990s, and early 2000s”—were globally synchronized. Most of these recessions coincide with US recessions due to the strong trade and financial linkages the US economy has with many other economies.
• Emerging markets and developing economies (EMDEs), cross-border trade, and financial linkages are playing an increasingly important role in global business cycles. Between 1950-1990, advanced economies, on average, contributed to about 80% of global output and 75% of global growth. By the 2010s, these figures dropped to around 60% and 40%, respectively.
• Global trade openness—“the sum of exports and imports of goods and services in percent of global GDP” and global financial openness— “the sum of foreign assets and liabilities in percent of GDP”—have changed drastically over the past decades.
• Global trade openness, which was, on average, below 20% in the 1950s, increased to over 50% by the 2010s. On the other hand, global financial openness grew from around 50% in the 1970s to almost 400% in the last decade. This new dynamic in globalization has raised the chances of more conspicuous and synchronous movements in the global business cycle.
• All four global recessions since 1950 were highly synchronized internationally, with intense multi-country economic and financial disruptions. However, the 2009 episode was, by far, the most synchronized and deepest of the four, with 35 of 36 advanced economies and roughly half of EMDEs in recession. This is possibly a reflection of “the unusual depth of the global financial crisis and much stronger international trade and financial linkages than in earlier episodes.”
• It is worth noting that while the examined sources do not link supply chain internalization to the 2009 recession, supply shocks in specific sectors have been named as a factor in the 2020 global crisis due to causing declines in overall spending.
• However, it has also been noted that the forecast post-2020 recession will emphasize that if multiple countries are dependent on one economy (in this case, it is China), the collapse of the national system can spur a global crisis. According to Atlantic Council, in the past four recessions, the same tendency was exhibited when the global economy was impacted negatively by downturns in Germany and the US.
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Impact of the Recessions Across Country Groups and Regions

• In the 2009 global recession, there were marked differences between the experiences of less-developed countries and that of most advanced countries. In 2009, while the combined output of OECD countries declined by 3.2%, it increased by 2.5% among the emerging and developing economies, which saw only a temporary decline in growth. In effect, the impact of the recession on developing economies was much less significant.

• Historically, during the global recessions, the average decline in per capita growth was more in advanced economies than in EMDEs. However, low-income countries suffered deeper declines than EMDEs.
• Some EMDEs, such as the East Asia and Pacific and South Asia regions, experienced continued expansion during global recessions. The other four EMDE regions, notably those that rely more heavily on exports of industrial commodities, saw declines in per capita output.
• In contrast with previous global recessions, during the 2009 episode, while the advanced economies which were at the epicenter of the financial crisis suffered the most, the story was different elsewhere. Output growth in the EMDEs remained positive, and post-2009 recovery was stronger than in any of the previous three recessions. Similarly, per capita growth continued in low-income countries as opposed to the previous three recessions.

Research Strategy

Key Takeaways

• Sources differ on when 'recession' was first used in the economic sense, but two sources agree that it was in 1929 when the Great Depression began.
• The IMF and World Bank track and declare global recessions, while the NBER tracks and declares recessions in the US. For the IMF and World Bank, the first global recession was in 1975.
• The first recession in the US that historians refer to, was the first of various Panics - the 1785 Panic.

Introduction

The Term 'Recession'

• The word recession comes from the Latin, recessus, meaning "a going back, retreat."
• It also comes from the French, récession, "a going backward, a withdrawing."
• Sources identify different dates for the first use of the word recession. The first use of the word in the general sense, meaning "to go backwards," was in 1652.
• While the first use of the word to mean reduced economic activity, according to Miriam Webster, was in 1828.
• In 1828, Britain banned trade between the US and other British colonies, and that caused a deficit, increased unemployment, and decreased individual consumption.
• When 'recession' on its own typically refers to a national event, the World Bank has only found four global recessions over the past 70 years. They were in 1975, 1982, 1991, and 2009. The World Bank's definition holds that annual real per capital global GDP contracted, accompanied by other key global economic indicators weakening.
• For Etymology Online, 'recession' was first used in the economic sense in 1929. It was coined in a euphemistic way, likely as a noun based on the verb 'recess.' The usage quote comes from The Economist, on November 2, and reads, "The material prosperity of the United States is too firmly based, in our opinion, for a revival in industrial activity — even if we have to face an immediate recession of some magnitude — to be long delayed." The book Movers and Shakers: A Chronology of Words that Shaped Our Age, also confirms that recession was first used in this way in 1929. Obviously, 1929 was when the Great Depression began.
• In 1938, author Eric Ambler also used the term 'recession,' talking about a trade recession and suggesting it was not very different to a slump.

Tracking Recessions

• There are various types of recessions, such as the Great Recession (used to describe the big one in 2008), and global recessions, distinct from national ones. The IMF can officially declare global recessions, while in the US, the National Bureau of Economic Research (NBER) monitors, registers, and declares country-wide recessions.
• Also, tracking recessions began well after the first ones happened. Ever since the Industrial Revolution, there have been economic declines - both global and national ones - but it wasn't till the last century that different institutions had begun to track them, and this century when global recessions have been thoroughly studied.
• The NBER was founded in 1920. It published its first business cycle dates in 1929. There have been other attempts to date recessions in the US going back to 1790, but these attempts did not happen until the 1920s. They looked at business annals, financial crises, a business index by the Cleveland Trust Company, and data from the National Bureau of Economic Research.
• For the NBER, a recession is the "period between a peak of economic activity and its subsequent trough, or lowest point." The bureau documents these peaks and troughs in this book and sums them up here. It notes the first trough date as December 1854.
• The NBER didn't start announcing peaks and troughs and cycles until 1978 when its Business Cycle Dating Committee was created. Since then, it has had a formal process of announcing recessions. Prior to that, it did not announce dates and turning points.
• The first detailed study and account of global recessions was by Kose and Terrones, in 2015, and it only looked at 1960 to 2012. This World Bank report is an extension of that study and covers 1950 to 2019. As noted above, within that time period, the World Bank found that 1975 was the first global recession, though many histories would point to the Great Depression as the first major global one.
• The CEPR, a European policy institute, argued that the 2008-2010 global recession was one of the first in decades, and referenced this time period because "There is overwhelming evidence world cycles have become significantly more synchronized with the crisis, relative to the 1980s." Because poorer countries can have completely different GDP patterns to wealthier ones, often experiencing faster growth, defining a recession on a global scale is more complex and debatable than on a national scale.
• In 1973 however, there was an oil shock, which would clearly have global consequences. The World Bank's study range doesn't go back to the World Wars, which were the other key events with global economic impacts. The IMF also identifies 1974-75 as the first period of global recession.
• The World Bank report also acknowledges four extra global downturns, where there was low growth at a global level, in 1958, 1998, 2001, and 2012.

 

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The First Recessions — the US

• For News on 6, the first recession in the US was in 1785. Post-war deflation and a great panic occurred that year. There was overexpansion and accrued debt, and the recession lasted four years.
• Stacker agrees that the first US recession was in 1785. It lists nearly 50 "notable national economic declines in America’s financial past." The 1785 event, though technically a recession, was called "a Panic" in common jargon, while the first recession that historians refer to as a recession (but it may not have been called that at the time), was the 1802–1804 recession. The end of the French Revolutionary Wars caused a slump in demand for war supplies and a dip in commodity prices.

The First Global Recession

• Going by the World Bank study, the first studied global recession was in 1975. It followed the shock to world oil prices from the Arab oil embargo which began in October 1973. The impact on supply and the sharp rise in oil prices saw high inflation and weakened growth in many countries. Five years of stagflation followed.
• Forbes, Newsweek, and the New York Times also declared 1975 a Great Recession.

Research Strategy

Key Takeaways

• The US divorce rate fell from 17.5 to 16.9 (both per 1000 total population) during the first full year of the Great Recession, as "many couples developed a new appreciation for the economic and social support that marriage can provide in tough times — from the start of the recession in 2007."
•  30% of recession-era students thought about social problems quite often, up from 26% before the recession.
• The economic and financial literacy of Americans increased during the Great Recession. It also sparked creativity and inspired many inventors/founders towards innovation, partly because they were "unemployed and tired of endless job fairs."

Introduction

Most Interesting Positive Externalities from the Last Two Recessions

1. Decreased Divorce Rates

• Marriage is not only an emotional relationship driven by intimacy, and individual happiness, among other factors. It is also an economic partnership and social safety net, especially during recessions.
• The Great Recession significantly impacted American families and households, including their income and spending power, among others. And to address it, millions of Americans adopted a home-grown bailout strategy, which involved leveraging marriages and families to deal with the adverse implications of the Great Recession.

 

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• Based on the divorce trend above, the US divorce rate fell from 17.5 to 16.9 (both per 1000 total population) during the first full year of the Great Recession, as "many couples developed a new appreciation for the economic and social support that marriage can provide in tough times — from the start of the recession in 2007."
• During these times, it was found that in clearing their credit card debts — an anathema to marriages — and building shared financial assets, marital bonds were strengthened among couples.
• Additionally, the Great Recession led to the implementation of austerity measures in homes, where American families were forced to produce their foods, mend their clothes, resorted to different DIY hacks, and ate at home. This inadvertently strengthened the solidarity and togetherness among couples and parents, including their children.
• Therefore, "by fostering a spirit of economic cooperation, family solidarity, and thrift that redounds to the benefit of marriage, the Great Recession appeared to offer a silver lining for marriage." The Maryland Population Research Center (MPRC) corroborated the declining divorce rates during the Great Recession; however, they hypothesize that it was because "many couples were simply postponing divorce until they could afford it."
• Similar observations were recorded during the pandemic-caused recession, where marital commitment and stability increased and state divorce trends dropped. The chart below demonstrates this observation.

 

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• During the pandemic recession, studies conducted by Pew Research showed that "one woman was quoted to have been stuck in the house with her husband, whom she had wanted to divorce for months."

2. Increased Economic/Financial Literacy Among Americans and Creativity Among Inventors/Founders

• Before the Great Recession, which started in 2007, many Americans were oblivious of the debt levels and economic downturn of their country.
• However, as the recession kicked in and the impacts hit hard, the average American came to understand the implications a bad loan can have on the entire economy if mismanaged or unchecked. They came to understand financial fragility, stability, and the need to be financially prudent.
• To some degree, Americans also became "more alert to financial malpractice and the sources of financial instability."
• Additionally, while the economic and financial literacy of Americans increased, the Great Recession sparked creativity and inspired many inventors/founders towards innovation, partly because they were "unemployed and tired of endless job fairs."
• The slow economic activity brought about by the recession led to less market competition, as well as less competition for talent and office space — as the market became over-saturated with businesses going after the same resources.
• These economic factors inadvertently provided an opportunity or 'enabling environment' for startups and new companies, such as Uber and Airbnb, as well as mobile payment companies like Square and Venmo, to launch.
• Some new companies, such as Groupon, became popular towards the end of the Great Recession by helping cash-strapped consumers, which raised the popularity of coupons again.

3. Young People Became Community-Oriented and Less Wealth-Minded

• Generally, with greater economic resources, people tend to focus on themselves. However, with the Great Recession of 2008 bringing massive reductions to the income and spending power of Americans, concern for others and environmentalism increased among especially young Americans.
• To demonstrate this development, a Monitoring the Future (MtF) survey revealed the following trends among young people during the Great Recession below (quoted):
•  36% of recession-era students were willing to take a bike or mass transit instead of driving, compared to 28% in 2004-2006;
•  63% of recession-era youth made an effort to turn the heat down at home to save energy, compared to 55% before the recession;
•  30% of recession-era students thought about social problems quite often, up from 26% before the recession;
•  43% of recession-era students thought it was important to correct social and economic inequalities, compared to 38% before the recession.
• Similar observations were made during the pandemic-caused recession, as a Pew Research survey revealed that the pandemic brought people in their communities together to help each other out by sharing foods, shopping for the elderly, making nose masks, and distributing them out to people and communities, among others. In general, there were instances where people brought out the best in society.
• Additionally, as young people became community-oriented due to adverse impacts of the Great Recession, they equally dropped their trappings for wealth because expensive material items, such as owning a vacation house, a new car every 2-3 years, one’s own house, and a recreational vehicle, were less important to them compared to pre-recession youths.

Research Strategy

Key Takeaways

• According to Business Insider, "The pandemic-caused recession led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending." Hence, Americans cleared their debts and explored savings options, as they more than doubled their savings in March, lifting their percentage of disposable income saved from 8% to 13%.
• The pandemic-caused recession inadvertently resulted in drastic reductions in the levels of carbon monoxide, carbon dioxide (CO2), and nitrogen dioxide emissions. CO2 levels were less than half of the normal levels seen in March in the previous years. Greenhouse emissions dropped by 17% in April — a record percentage drop since 2006.
• Despite the challenges of the pandemic and the covid-caused recession, Americans were buying their dream homes. While a substantial amount of the growth in homeowners was observed before the pandemic kicked in (up 1.6 million from the first quarter of 2020), the recession favored some Americans.

Introduction

Additional Most Interesting Positive Externalities from the Last Two Recessions

1. People Managed their Personal Finances Better

• The pandemic-caused recession brought about a sharp decline in consumer spending, as it dropped by 7.5%. As well, the personal incomes of Americans dropped as the government responded to the pandemic by issuing stay-at-home orders.
• The lockdown and subsequent recession limited entertainment options for consumers, as most bars and restaurants were shut down, thereby cutting down consumer spending. Furthermore, credit card spending dropped as balances crashed by $76 billion in the second quarter of 2020, which is the largest drop ever recorded by the Federal Reserve Bank of New York.
• "This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending," as per Business Insider.
• Consequently, savings options were significantly explored, "as Americans more than doubled their savings in March, lifting their percentage of disposable income saved from 8% to 13%, as per the Bureau of Economic Analysis." Available data shows that the personal savings rate peaked in April, as Americans saved up $6.4 trillion — about a third of their disposable income.

 

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• As per the survey conducted by Pew Research, some respondents (13%) noted that they were able to save more because they did not spend as much on clothes, cosmetics, hangouts, eating out, transportation, and shopping, among others.
• In addition to savings options, Americans were also clearing their debts during the 2020 pandemic, as the US government supported citizens through loan deferrals and relief aid programs, such as the stimulus package and unemployment benefits, launched in response to the pandemic and the ensuing crisis. Total household debt fell that quarter for the first time since 2014.
• According to Fortune, "household debt to gross domestic product was nearly 100% before the Great Recession. However, after the recession, household debt dropped back to around 80%" — demonstrating that financial frugality forced households to reduce their debts.
• According to Ethan Dornhelm, FICO’s Vice President, the well-planned response of the government significantly influenced how Americans managed their finances, including savings commitments and paying off debts.

2. The Environment/Society Became 'Cleaner'

• 'Supra economic factors' measure the wellbeing of societies as affected by economic factors. These factors, such as peace and quietness, as well as certain environmental conditions, are usually inversely related to economic activity.
• The global pandemic and the subsequent covid-caused recession resulted in people staying at home and/or working remotely and governments placing restrictions on outdoor activities. As such, economic activities, including aviation, manufacturing, and construction, among others, slowed down and, in some instances, crashed.
• The covid-caused recession inadvertently resulted in drastic reductions in the levels of carbon monoxide, carbon dioxide (CO2), and nitrogen dioxide emissions. CO2 levels were less than half of the normal levels seen in March in the previous years. Greenhouse emissions dropped by 17% in April — a record percentage drop since 2006.

 

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• Furthermore, ravages of particulate matter, nitrogen dioxide, and industrial emissions nose-dived. "For example, In February, Chinese CO2 emissions dropped at least 25%.
• Biodiversity-related indices, such as wildlife conservation and turbidity (i.e., clarity of water) are improved due to less economic activity. "For example, the water is visibly cleaner in Venetian canals, giving visitors (on foot or aboard gondolas) the joy of spotting fish below and clear reflections of swans above."
• Additionally, society saw other 'supra economic' (or socio-environmental) silver linings of the covid-caused recession, including reduced traffic congestion, less noise from industrial/economic activities, more family time, and less crime. Some Pew Research survey respondents remarked that the air was cleaner with fewer cars on the road during the pandemic.
• Corroborating the above, StreetLight Data, which monitors county-level driving activity across the country, revealed that "the total vehicle miles traveled in the US fell 86%, from 18.2 million on March 6 to a low of 2.4 million on April 12."

 

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3. Increased Homeownership Rates

• Despite the challenges of the pandemic and the pandemic-caused recession, Americans were buying their dream homes. While a substantial amount of the growth in homeowners was observed before the pandemic kicked in (up 1.6 million from the first quarter of 2020), the recession favored some Americans.
• In the fourth quarter of 2020, there were about  82.8 million owner-occupied households in the US — an increase of about 2.1 million year-over-year (or 2.6%). This equaled the largest year-over-year increase in homeowners that occurred during the housing boom between 2003 and 2004.

 

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• The surge in homeownership (i.e., number of homeowners) also raised the homeownership rate (percent of owner-occupied households), as the figure increased from 65.1% in the fourth quarter of 2019 to 65.8% in the fourth quarter of 2020. Furthermore, the growth was more dominant among households headed by someone aged 65 or older (1.2 percentage points), as well as households with family incomes below the national median (0.9 percentage points).

 

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• While there were job losses and a surge in unemployment during the pandemic, it was predominantly among young adults and low-income earners. Hence, it didn't stop mid- to high-income earners from purchasing houses.
• The pandemic brought about interest rates that were at record lows while household incomes were at a record high, including for most age groups leading into the pandemic, "with the median adjusted household income at $80,700 in 2019, up from $76,000 in 2018."
• In addition to low-interest rates, the recession also led to low mortgage rates. As such, housing prices dropped significantly — even in expensive markets like New York, San Francisco, Miami, and Chicago, according to UBS, an investment bank.

 

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• These factors (above), caused by the pandemic and the ensuing recession, made it easier for Americans to take the next steps in getting their dream homes.
• According to Pew Research, "In addition, the net increase in homeowners reflects a slowdown in foreclosures. Before the pandemic, the foreclosure rate was far below its 2010 peak. While the recession has made it more difficult for some homeowners to stay current on their mortgage payments, the foreclosure moratoriums have thus far prevented many homeowners from losing their homes."

Research Strategy

Key Takeaways

• The price of gold rose by 78.9% from October 2007 to October 2009.
• The value of silver rose by 1.1% from October 2007 to March 2009.
• According to Investopedia, "securities that are believed to be recession-proof often have negative beta values (such as gold), which would indicate an inverse relationship to the greater market."

Introduction

Gold

• During recessions, gold continues to be the asset people turn to for protection. Nothing compares to the value preservation of genuine gold bullion when stocks, bonds, and currencies all decline at the same time. The price of gold frequently rises during periods of worldwide sociopolitical unrest and economic duress.
• According to Investopedia, "securities that are believed to be recession-proof often have negative beta values (such as gold), which would indicate an inverse relationship to the greater market."

• According to a Forbes article by the Global Head of FX and Digital for Atlas Bank, "another investment strategy during times of uncertainty is to use gold as a safe haven. Investors typically funnel money into gold because it is a physical, tangible asset that is considered recession-proof."

Historical Data

• In 1929 during the Great Depression, an ounce of gold was priced at $20.67. In 1934, an ounce of gold was priced at $35. 
• In 2009, during the Great Recession, gold prices jumped 12.8 percent after climbing a relatively modest 2.8 percent in 2008 as investors sought a reliable commodity that would probably keep its value through the recession.
• The price of gold rose by 78.9% from October 2007 to October 2009.
• Gold has seen a large gain in value in 75% of all market downturns.
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  Source
   

Silver

• Like gold, silver is a precious metal with value-preserving qualities and extensive uses in industries across the world. It also has high volatility and reduced correlations with equities and bonds.
• According to a Forbes article by Regal Assets' CEO, Tyler Gallagher, "when markets are afflicted by uncertainty and volatility, precious metals tend to perform relatively well compared to traditional assets. Due to its widespread application in electronics and jewelry making, silver can be a reliable store of value over long time horizons." He adds that "silver can play a diversifying role for retirement investors because it tends to steadily retain its value over time and outpace inflation."

Historical Data

• In August 2007, before the Great Recession, the price of silver was $11.95 per ounce. In December 2007, silver was priced at $14.76 per ounce.
• Silver's price peaked at $19.24 per ounce at the end of February 2008, but it subsequently fell to $9.09 by the end of October 2008. However, at the end of the Great Recession, silver was priced at $13.94 per ounce.
• The value of silver rose by 1.1% from October 2007 to March 2009.
  Source
   

Research Strategy

Key Takeaways

• During the 2008 Great Recession, three out of ten top stocks that had the highest return were from the healthcare industry. For instance, Vertex Pharmaceuticals had a total return of 30.8%, Amgen had a total return of 24.3%, and Edwards Lifesciences had a total return of 19.5%. 
• An analysis conducted by the US Bureau of Labor Statistics found that employment in healthcare continued to grow during the 2008 Great Recession. The US Bureau of Labor Statistics reported that the healthcare industry added 428,000 jobs during the period.
• During the 2008 Great Recession, discount retailers such as Dollar General and Walmart had high total returns in the S&P 500. Dollar General had the highest total return in 2008 (60.8%). Walmart was in 6th place with 20.0% total returns.

Introduction

Discount Stores

• Given that consumer income is reduced during recessions, consumers either buy fewer products or buy cheaper goods.
• Since there is a certain amount of fundamental products, such as food and basic home supplies that consumers must purchase, it implies that they will seek out less expensive options in order to save money on them. Discount stores will thus probably prosper during a recession.
• According to a Forbes article by Optima Office's CEO, "while an economic downturn spells trouble for most, recession-proof businesses, such as rental agencies, discount retailers and even those companies that make tools for DIY projects, can experience a dramatic increase in business as buyers make more conservative decisions about how to spend their money."

Historical Data

• During the 2008 Great Recession, discount retailers such as Dollar General and Walmart had high total returns in the S&P 500. Dollar General had the highest total return in 2008 (60.8%). Walmart was in 6th place with 20.0% total returns.
• According to NBC, in 2008, Family Dollar reported sales of $7.4 billion, in contrast to the $6.395 billion it had reported in 2007.
• Additionally, in 2008, Dollar General reported sales of $11.8 billion in contrast to the $9.5 billion it had reported in 2007 and $9.17 billion that it had reported in 2006.

Healthcare

• A study that examined the relationship between the healthcare industry and economic conditions found that "the healthcare sector is particularly stable with respect to economic turmoil. In fact, when counties experience more severe economic downturns, healthcare employment seems to increase."
• According to The Motley Fool, "healthcare stocks tend to be relatively recession-proof. People can't defer most healthcare spending."
• According to a Forbes article, "with stocks falling into a bear market this year amid fears that aggressive rate hikes from the Federal Reserve will plunge the economy into a looming recession, top firms on Wall Street are advising investors to stick with stocks that have historically performed well during past downturns, such as consumer and healthcare companies." 

Historical Data

• During the 2008 Great Recession, three out of ten top stocks that had the highest return were from the healthcare industry. For instance, Vertex Pharmaceuticals had a total return of 30.8%, Amgen had a total return of 24.3%, and Edwards Lifesciences had a total return of 19.5%. 
• An analysis conducted by the US Bureau of Labor Statistics found that employment in healthcare continued to grow during the 2008 Great Recession. The US Bureau of Labor Statistics reported that the healthcare industry added 428,000 jobs during the period.
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  Source
   

Research Strategy

Key Takeaways

• Because of Bitcoin's strong correlation to US stocks — from the NASDAQ Composite Index to the S&P 500 to the NASDAQ 100 — the performance of the cryptocurrency is likely to depend on "what the broader market does." This correlation suggests that cryptocurrency returns could suffer should a recession occur.
• According to Brian Armstrong, CEO of the cryptocurrency platform, Coinbase, after over 10 years of economic boom, a recession now looks likely; he notes that a recession could lead to "another crypto winter, and could last for an extended period." Crypto winter refers to an extended period when cryptocurrency prices fall and remain low.
• Art historian, Donovan Gauvreau, notes the art industry typically plunges during economic hardships but typically recovers relatively easily; the reason for this is that art contains two values: i) a personal/intrinsic value, ii) and a commercial value.

Introduction

Crypto Industry

• Overall, the COVID-19 recession in 2020 had a positive impact on cryptocurrencies; Bitcoin, for example, experienced an initial dip in price before rallying to an all-time high.
• Proponents of cryptocurrencies such as Bitcoin have long equated Bitcoin to digital gold and an effective hedge against inflation due to its decentralization and limited supply. However, the value of cryptocurrencies has tumbled significantly in recent months amidst the rising inflation rates and geopolitical uncertainty.
• The overall market cap of crypto assets has plunged considerably from its November 2021 peak of $3 trillion to less than $1 trillion today.
•  Nick Colas, the co-founder of DataTrak Research, reiterates — "There is never a safe haven when the storm is in full force. The people who own crypto tend to own stocks, and that means that even if the asset class is fundamentally unlinked to stocks, it is still linked through investor confidence in the future."
• If the analysis is accurate, and the United States economy enters a recession in the near future, the crypto market is likely to experience very different results this time relative to 2020.
• A number of analysts believe that because of Bitcoin's strong correlation to United States stocks (from the NASDAQ Composite Index to the S&P 500 to the NASDAQ 100), the performance of the cryptocurrency is likely to depend on "what the broader market does."
•  Bob Iaccino, chief strategist at Path Trading Partners said — "Bitcoin has really bound itself to the NASDAQ in terms of correlation, and if the Fed keeps hiking rates and if the market believes [it is] going to hike rates, recession or not, NASDAQ suffers in the short term. And if this correlation continues, then crypto suffers, too."
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  Source
   
• This strong positive correlation suggests that cryptocurrency returns could suffer should a recession occur. This does not just ring true for Bitcoin exclusively but affects a substantial number of other crypto assets (e.g., ETH).
•  Howard Greenberg, a cryptocurrency educator for Prosper Trading Academy, said, "During an extended recession I think we will see positive price movement with BTC but the rest of the crypto market would face headwinds as investors continue to move risk off and investors find it harder to raise funds in a tighter lending market."
• According to Brian Armstrong, CEO of the cryptocurrency platform, Coinbase, after over 10 years of economic boom, a recession now looks likely; he notes that a recession could lead to "another crypto winter, and could last for an extended period." Crypto winter refers to an extended period when cryptocurrency prices fall and remain low.

Non-Fungible Tokens (NFT)

• Non-fungible tokens (NFTs) are tokens that can use be used to represent ownership of items; they allow users to tokenize items such as art and collectibles.
• The value of collectible NFTs and art arguably derives from wider public opinion of the work; Michael Findlay, the director of Acquavella Galleries, believes that similar to currency, the commercial value of art "is based on collective intentionality," and that "human stipulation and declaration" create and sustains its value.
• Helio, a cryptocurrency lending aggregation company, believes that due to the above, it is challenging to predict how the NFT market will behave during a recession. It references a study by Louis Lévy-Garboua and Claude Montmarquette, according to which art is a luxury good that typically only performs well during a recession when its prices drop because consumers prioritize necessary goods.
• However, the study explains the limitations of this scenario. Art inspires aesthetic and emotional responses that can't be quantified but are important purchase drivers. Therefore, untypical consumer behaviors related to purchasing art during a recession are possible.
• Art historian, Donovan Gauvreau, noted that the art industry typically plunges during economic hardships but typically recovers relatively easily. The reason for this is that art such as NFTs contains two values: i) a personal/intrinsic value, ii) and a commercial value.
• Nassim Nicholas Taleb, author of "The Black Swan" who predicted the Great Recession, recently tweeted, "The NFT thingy is starting to burst. All you need is higher interest rates for things that make no sense to start making no sense." He provided an example of Jack Dorsey's tweet, which sold as an NFT for $3 million but is now worth less than $14,000, showing that the market is already decreasing in value due to the economic uncertainty. While no more context was provided, the tweet suggests NFTs may not fare well during a recession.

Research Strategy

Key Takeaways

• Profits at candy company Cadbury went up 30% during the Great Recession, and candy profit at Nestle increased by nearly 11%.  

• So many consumers indulge in lipstick during an economic downturn that the occurrence is referred to as 'the Lipstick Effect' in the beauty industry.
• Over-the-counter contraceptives also see an increase during an economic downturn with sales jumping nearly 10% in 2008.

Introduction

Candy & Chocolate

• One market segment that thrives during economic downturns and recessions is candy and chocolates.  
• The reason behind this is that when people face challenges, they often turn to candy and small treats to try to feel better. 
• Specifically, because candy is typically an affordable treat, it can be used as a 'pick me up' during a recession.
• It also is often associated with the nostalgia of better times, making it a staple during an economic downturn.
• During a recession, people may also spend more time at home, and buy candy to consume at home.  
• Candy sales hit a record high in early 2022, which may signal a lack of confidence in the economy and a coming recession.
• According to the New York Times, one of the largest rises in the sale of candy occurred in 2009, at the height of the Great Recession.
• Lollipops, in particular, saw a huge increase in 2009. 
• Profits at candy company Cadbury went up 30% during the Great Recession, and candy profit at Nestle increased by nearly 11%.  
•  Higher-priced chocolate also has increased demand during a recession as an affordable luxury to reduce stress during tough times, with German boxed chocolate sales increasing by 12% in 2009.

Contraceptives

• Another unexpected market to show strength during an economic downturn is contraceptives.  
•  One article from 2008 shows that Americans increased spending on birth control methods during the recession, potentially in an attempt to prevent the potential cost of an unplanned pregnancy.
• For example, an information site on vasectomies saw a 30% increase in appointment requests during the Great Recession.
• Over-the-counter contraceptives also see an increase during an economic downturn, jumping nearly 10% in 2008.
• Another report shows that condom sales jumped 5% in the fourth quarter of 2008 compared to the previous year.
• On an interesting and potential related note, dating services also see strength during a recession. 
• For example, one executive at Match.com says that their dating website sees increased engagement during times of anxiety, including the economic downturn and uncertainty of 2020.

Lipstick & Affordable Cosmetics

• So many consumers indulge in lipstick during an economic downturn that the occurrence has begun to be referred to as 'the Lipstick Effect' in the beauty industry.
• Also referred to as the Lipstick Index, lipstick and affordable cosmetic items tend to increase in purchase during times of economic downturn.
• The lipstick effect was first coined in 1998 in the book The Overspent American, written by economics professor Juliet Schor, who noted, "Cosmetics are an escape from an otherwise drab everyday existence."
• The thought behind this market seeing strength during the recession and economic challenges is that women gain an emotional uplift through buying small cosmetic items without needing a large budget to do so.
• Lipstick specifically was where women would spend more, as luxury lipstick is used in public and semi-public spaces, whereas the same women would forego spending on beauty products applied in private such as face wash or eye products.
• One source showed that lipstick and lip makeup sales grew 48% in the first quarter of 2022, which according to some experts, may indicate a coming recession.
• Additionally, Estee Lauder chairman Leonard Lauder notes that he saw a spike in lipstick sales both during the recession of 2008 as well as during the brief economic uncertainty following the 9/11 terrorist attacks.
• Nail polish is another affordable cosmetic that performs well during a recession. According to Euromonitor, it experienced double-digit growth during the Great Recession.
  Source
   

Research Strategy

Key Findings

• According to the Reserve Bank of Australia, Economic hardship following a recession is felt unequally across society.
•  Less-well-educated individuals and those with lower socioeconomic status are typically harder hit during economic crises.
• Business cycle recessions decrease income inequality by 50% in non-OECD and middle-income countries.
•  Brookings highlights that the middle class is less prepared to deal with a recession than they had been in previous years. This suggests that lower classes are even worse positioned and, therefore, likely to face more significant consequences.

Introduction

Impact of Recession on Different Socioeconomic Groups

Economic Distress

• A document issued by the Reserve Bank of Australia notes unemployment that occurs during and after a recession leads to an increase in "economic hardship that is felt unequally across society." It goes on to say that it reduces the opportunities available to those more affected by the recession, leading to impacts on health, wealth, learning, ability to obtain qualifications that can allow them to improve their position, and social mobility.
• A study from 2018, looking at the growing socioeconomic divide and the effects of the Great Recession on perceived economic distress in the United States, found that less well-educated individuals and those with lower relative SES (socioeconomic status) felt a more severe impact from the recession than those with a higher SES. The table below compares the perceived financial strain felt by the bottom 1% with the top 1% SES during questionnaires completed in 2004-5 and 2013-14.

 

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• The study found that for those in the bottom 1% of SES that were not subject to any recession hardships, as described in the chart above, levels of perceived financial strain went up. However, those in the same group who experienced all three of the hardships perceived their financial strain as decreased.
• Outcomes were found to be more favorable for those considered to be in the top 1% of SES. The predicted change in financial strain for an individual in the bottom 1% of SES (+0.41 SD) versus a person in the top 1% (-0.19 SD), suggested at that time an additional 0.6 SD gap between the bottom and top SES.
• A Taylor Francis Online study looked at whether recessions cause income inequalities, using data from 43 countries from 1960 to 2016.
• It found that, overall, recessions have a negative impact. However, it also found that the level of economic development within a country affected the impact. The study looked at business cycle recessions and growth cycle recessions separately. It discovered that business cycle recessions decreased income inequality in 50% of the countries. This was most prevalent in non-OECD countries and middle-income countries. In a growth recession, the same impact was felt but in fewer countries. The effect is felt more strongly in high-income and OECD countries.

Health and Mortality

•  Social, Science, and Medicine notes that the link between economic recessions and health, especially mortality, has been the subject of a number of studies, the results of which are contradictory. The paper looked at 19 separate studies that incorporated Europe, Asia, the United States, and Somalia. The most studied period was the Great Recession in 2008, although specific countries' economic crises such as the fall of the USSR were also looked at. 15 out of the 19 studies found an overall or partial increase in mortality inequality following a recession.
• Another study considered the effects of the 2008 economic crisis on socioeconomic inequalities in mortality in nine urban areas in Europe. As noted above and in the article, the economic impact of a recession is found to be harder on disadvantaged social groups, and therefore, the impact on health is likely to be harder too. The study found that there were for men noticeable inequalities in mortality in all the socioeconomic indicators, periods, and urban areas studied, but during the economic crisis, important changes were not seen. For women, the inequalities seen were less.
• The Economic Observatory notes that recessions will affect different groups in society in different ways. It observes economic crises tend to increase the number of chronic diseases in individuals after the crisis ends. For instance, the rate of mental illness in the UK increased after the 2008/2009 crisis. It focuses on the link between recessions and mortality. In doing so, it considers how individuals' changes in behavior may affect the rates of mortality. For instance, people may not drive so much, so road accidents will be less, and they might cut down on things like alcohol and smoking. The changes people make are likely to be driven by their overall socioeconomic status, as well as what they could afford prior to the crisis.
• The Institute for Fiscal Studies in the UK also notes that low-income and low socioeconomic status populations are more likely to suffer harder consequences from a recession, based on the example of the COVID-19 pandemic. Disadvantaged groups could include those with health vulnerabilities and mental health issues.
• A study of socioeconomic inequities related to tuberculosis in a Southern European city during a recession found that incidences of the disease in the poorest neighborhoods were 2.72 times higher than for the least deprived ones.

Different Classes

• Voxeu states that a sizable middle class is needed to "protect societies against socioeconomic and political instability". The article looks at how an economic crisis or shock, more specifically unemployment, can have the effect of squeezing the middle class.
• The impact can be dependent on the government policies in place and their ability to address the shock that comes from the crisis. The article references a study by Batinti and Costa-Font from 2019, which was not found to be publicly available. It discovered that countries that have a higher level of spending on unemployment insurance do not experience a squeeze on the middle-class group. It also found that during a recession and afterward, when unemployment is high, the number of people who define themselves as middle-class increases. They conclude that this may be due to those who aspire towards the top-level of income distribution to be middle-class.
• An article by Brookings notes that the middle-class (in the US) is unprepared for the impact of the COVID-19 pandemic and the likely recession that will follow. The middle class is defined as those who earned between $25,300 to $111,400 in 2016. The savings levels of the middle class are not the same as it was prior to the Great Recession, so they are less able to accommodate the impact of the coming recession. Savings levels are said to be at only 8% in that group, as shown below. People will need to draw on their savings, and obviously, the less they have available, the less likely they are going to be able to meet their outgoings. Whilst this focuses on the middle-class group, it highlights that they are not going to be able to cope with the pending recession. Therefore, those with lower income will be even worse positioned.

 

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• The Institute for Fiscal Studies in the UK states those who were more vulnerable or less well-off prior to the COVID-19 pandemic are less likely to be able to weather the storm that follows. The group they refer to are those with lower incomes, those who could not work from home, or who do not have any savings.

Research strategy

Key Takeaways

• One of the more measurable and, therefore, visible ways in which American venture capitalists work differently during a recession is their slowed pace of investment during such periods. The 2008 recession provides evidence of this change in behavior, given that "funding amounts at Series A, B and C dipped between 40 percent and 47 percent in 2009 compared to funding in 2008," while "unique companies funded from Series A thorough Series C fundings declined as well in 2009 between 26 percent and 28 percent year over year."
• In tandem with this slowed pace of investment, venture capitalists tighten their investment criteria during a recession. While VC firms "don't have the luxury to sit on capital as that could impact the timeline and returns of their ongoing funds," venture capitalists will deploy available funds more "cautiously" during periods of economic decline.
• Consistent with this tightening of investment criteria, VCs also demonstrate a shift in focus to later-stage investments during a recession, when compared with their funding behavior during bull markets. The most recent 2020 recession demonstrates this change in target companies, given that "in 2Q2020, Global Seed and Angel round investments fell by -38% in dollar terms and -58% in the number of deals closing, while late-stage VC investments fell by only 8.7% in the second quarter, and growth stage investments, those made in the latest funding stages, were up over 4x."
• Finally, US venture capitalists work differently during a recession by placing new emphasis on shoring up their existing portfolio companies to weather the economic storm. Not only do "VCs increase their ownership of their best startups" during periods of economic decline, but "every venture capitalist is...forced to triage their portfolios against recessionary vulnerability (impact on cash, capital raising plans, burn rates, revenue projections, budgets, etc.)" amid an impending recession.

Introduction

Slowed Investment Pace

• One of the more measurable and, therefore, visible ways in which American venture capitalists work differently during a recession is their slowed pace of investment during such periods, as highlighted by investor trades (Nasdaq), US VC firms (7BC Venture Capital, Bowery Capital) and investment data sets (Crunchbase).
• Generally speaking, the "pool of VC funding on the market reduces in size" during a recession as does the pace of such investments, according to 7BC Venture Capital CEO and General Partner Andrew Romans.
• A key driver behind this shift in behavior is the "denominator effect," which is described by Nasdaq as the phenomenon where limited partners (LPs) such as pensions, university endowments and the like find themselves overweighted towards venture capital in their investment portfolios because the value of public equities has fallen.
• As a result of this allocation imbalance, LPs lower their cadence of investing in venture capital during a recession, and experienced VC firms respond by similarly slow[ing] the pace of their investments "to time the raise of their next fundraise for when LPs are investing in VC again."
• In parallel, VCs that were planning to raise a new fund will put such efforts on hold until capital markets become more receptive, while those firms in the middle of raising new capital frequently close their funds at a smaller size in response to weakening the investor interest.
• This front-end reduction in available capital for VC firms during a recession is corroborated by global data provided by Bowery Capital, which found that "capital raised by funds drop[ed] from $88.4B to $49.9B after 2000, and $53.2B to $22.7B after 2008."
• Additionally, the resulting change in VC investment volume and pace is validated by data from the 2008 recession as analyzed by Crunchbase, which calculated that "funding amounts at Series A, B and C dipped between 40 percent and 47 percent in 2009 compared to funding in 2008," while "unique companies funded from Series A thorough Series C fundings declined as well in 2009 between 26 percent and 28 percent year over year."

 

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• Crunchbase datasets also reveal a similar (if less pronounced) trend towards slowed VC investment during the most recent 2020 recession, as depicted below.

 

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Tightened Investment Criteria

• In tandem with this slowed-down pace of investment, business media (PitchBook, Nasdaq) and American VC firms (Bowery Capital, Alumni Ventures) report that venture capitalists tighten their investment criteria during a recession.
• Considering that VC firms "don't have the luxury to sit on capital as that could impact the timeline and returns of their ongoing funds," Lerer Hippeau Managing Partner Eric Hippeau reports that venture capitalists will continue to deploy funds during a recession, but will do so more "cautiously."
• Alumni Ventures echoes this statement by noting that VCs doing deals during a recession are more selective, and typically fund companies only if they have "both clarity of purpose and track records of success operating in capital-scarce environments."
• Bowery Capital adds that venture capitalists may "tighten their investment criteria" along several more specific parameters, including:
• Looking for startups with strong, maintainable cash flows.
• Preferring startups that offer "sustainable profitability instead of excessive growth."
• Prioritizing investment opportunities with businesses that have shorter sales cycles, faster beta testing for new products, and lower customer acquisition costs.
• Requiring potential investment pitches to include "realistic contingency plans" in addition to "aggressive financial targets."
• As a result, Nasdaq reports that companies with promising business models still get funded during a recession, while others "may starve to death."

Shifted Focus for New Investments

• Consistent with venture capitalists' tightened capital allocation criteria, these American firms also demonstrate a shift in a preferred deal stage during a recession, per PitchBook, 7BC Venture Capital, and JC Venture Capital.
• According to 7BC Venture Capital's Mr. Romans, investors such as VCs typically transition to later-stage investments during a recession, when compared with their funding behavior during bull markets.
• In particular, the VC executive states that "VCs and angels move along the continuum away from early-stage, pre-revenue and seed investing and gravitate more towards revenue generative startups" during periods of economic decline.
• JC Venture Capital adds that this transition to later-stage investments commonly appears in the form of funding larger startups that are looking for follow-on financing to strengthen their balance sheets going into/during a recession.
• This is due to a higher interest in startup profitability over revenue growth during challenging economic conditions.
• As evidence of this shift in focus for new investments, JC Venture Capital notes the dramatic dropoff in early-stage funding alongside the increase in later-stage deals by VCs during the most recent 2020 recession.
• Specifically, "in 2Q2020, Global Seed and Angel round investments fell by -38% in dollar terms and -58% in the number of deals closing, while late-stage VC investments fell by only 8.7% in the second quarter, and growth-stage investments, those made in the latest funding stages, were up over 4x."

Focus on Reinforcing Existing Portfolio Companies

• Finally, US venture capitalists work differently during a recession by placing emphasis on shoring up their existing portfolio companies to weather the economic storm, as discussed by investor trades (PitchBook) and American VC firms (7BC Venture Capital, Alumni Ventures).
• Most notably, 7BC Venture Capital highlights the fact that VCs increase ownership stakes in their startups during periods of economic decline, both to double down on strong bets and reinforce the companies' chances of success.
• In parallel, Alumni Ventures reports that venture capitalists need to defend portfolios against recessionary vulnerability "(impact on cash, capital raising plans, burn rates, revenue projections, budgets, etc.)" amid an impending recession.
• This is more specifically demonstrated by venture capitalists working with their portfolio companies to outline and implement "strategies for sustainable growth" during periods of recession. As an example, Sequoia Capital encourages its existing investments during periods of recession to:
•  "Extend cash runways"  
• "Plan contingencies based upon the market environment"
• "Conduct only mission-critical projects"
• "Raise the ROI bar on marketing spend"
• And "do more with less headcount."
• Similarly, Base10 Partners and 7BC Venture Capital share their emphasis on shifting portfolio companies into profitability (over higher growth) in periods of economic decline.

Research Strategy