Harry Geels: Recessions? No longer allowed!

January 7, 2025

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

The duration of recessions is decreasing, and with it the volatility of the business cycle. This is partly due to the growing role of governments and central banks, aided by better data control, economic diversity and advancing technology. Relying on the 'invisible hand' of market forces is long gone. Is that a problem?

Recessions are lasting shorter and shorter, as Figure 1, among others, shows the average number of months in recession during 30-year periods. In recent decades, recessions have averaged no more than three years. The two most recent major recessions (the GFC and the corona crisis) have lasted even shorter. Figure 2 shows a similar story: the percentage of quarters in recession is decreasing. The source of this figure, Professor Harvey Campbell, thereby also argues that the volatility of business cycles in the US is decreasing.

Figure 1 - Average number of months of U.S. recessions

Source: Alfonso Peccatiello/Lee Coppock/NBER

Figure 2 - Rolling 20-year % of quarters in recession

Source: Campbell Harvey/NBER

Main causes shorter-term recessions

One of the root causes of shorter recessions lies with the government, which is an increasingly large component of the economy. Most government activity is less cyclical. Moreover, governments have an almost uneradicable propensity for fiscal stimulus. In Figure 3, the dashed green line shows how the U.S. government has been spending more and more during (and also after) the corona crisis and that government spending has kept pace with economic conditions (blue solid line).

Figure 3 - Government spending versus Chicago Fed Survey Economic Conditions

Source: fred.stlouisfed.org

Another important cause lies with central banks, which provide monetary stimulus during crises. Initially they did this mainly by turning the interest rate knob (lower interest rates during recessions), but in the last recessions they found that more monetary doping was needed and started to expand the quantitative easing, i.e. printing additional money, in order to push down interest rates on the capital markets and boost asset prices, so that owners feel richer and spend extra on their assets.

Not insignificant side issues

Referring to BlackRock's 'Global Outlook 2025' with the phrase '[We] should no longer think in terms of business cycles,' there are other issues at play, according to Campbell Harvey. First, he too talks about fiscal and monetary stabilizers. He further argues that the authorities now have better economic data, allowing them to make earlier and better adjustments. In addition, the U.S. economy in particular is increasingly diversified, across sectors, different consumer and income groups, and global multinationals.

The latter provides diversification. If one part of the economy does not do well, another catches it. Another positive development would be advancing technology, which helps further improve not only labor productivity but also the diversity (and inequality) of the economy. Those with good data and advancing technologies are potential winners. According to Harvey, the U.S. is miles ahead of Europe here: 'The EU, for example, has far too little R&D and far too much regulation.'

We also see the increasing importance of the service sector, where stock effects or investment cycles play a much smaller role. Furthermore, recessions often find their cause in manufacturing (factories with high fixed and few variable costs), which the West has increasingly outsourced to China and other emerging markets. Possibly, finally, another factor is that wars have been shorter in recent decades and more localized than they used to be.

Finally, two (more philosophical) observations

It seems like a gamble where you can’t lose: short recessions and less clear business cycles. But it isn't. First, more monetary and fiscal stimulus has some far-reaching consequences, for example, authorities increasingly have a steering role in the economy. We have become much more of a planned economy than a free-market economy in recent decades. There is no longer an “invisible hand” of capitalism. Monetary and fiscal stimulus also means more inflation, of products or assets, or both.

The interference of the authorities also leads to large “wealth transfers,” for example, from savers to debtors and from have-nots to haves, both through (too) low interest rates and higher inflation. Another consequence is the emergence of zombie companies, which can only stay afloat through stimulation, but in doing so impede the necessary innovation (also for the energy transition). There is also the danger that more and more stimulation is needed to keep things going, with a major crisis eventually occurring.

Is there a price to pay? Some analysts argue that the policy of continual fiscal and monetary easing is tantamount to kicking a can down a dead end. Donald Trump seems to want to avert that by even more growth, fewer regulations and lower taxes, in order to gain economic air, hoping thereby to reduce the role of government (and its debt). Who knows, maybe it will work.

A second important observation is that we see shorter-lived crises mostly in countries with greater fiscal and monetary power, and this seems to be a self-reinforcing spiral: the more power, the shorter the crisis. We see the hegemony of the US through a combination of technological, fiscal and monetary power increasing visibly. China is floundering and Europe is gasping for air.

This article contains a personal opinion of Harry Geels

More columns by Harry Geels