Recession Obsession

February 12, 2020 8:55:55 PM

Unfortunately, the word ‘Recession’ is one of those rare words that, although many have little idea as to its true definition, the mere sound of the word denotes a negative connotation. Moreover, even through casual conversation, we have been trained to stay clear. Like many diseases and plagues of several centuries past, we may not know what they specifically were other than the fact that they were deadly. In our estimation, the word ‘Recession’ carries a similar stigma and, much like the aforementioned diseases, all we know is that it is bad, and the best remedy is to stay clear! What is most unfortunate is the manner in which the term ‘Recession’ is incorrectly defined. It is correct that the “academic definition” of the term ‘Recession’ is simply “two consecutive quarters of decline in GDP.” When GDP is negative for six consecutive months, the textbook would tell you that a given economy is not advancing but is contracting, a.k.a. Recession.

Much to the chagrin of economic professors, actual recessions in the real world are determined in a much broader context and in a more subjective manner. The true arbiters (or arbitrators depending on how you say it) of Recessions are a little known, non-profit research firm known as the NBER or the National Bureau of Economic Research located outside of Boston in Cambridge, MA. The NBER, at nearly 100 hundred years of operation, has a rich history in determining when the US Economy is operating, as they refer to it, in “Expansion” or “Contraction” mode. Expansion, of course meaning periods of growth, and periods of contraction which we would refer to as Recessions. Well known past members include Ben Bernanke and Martin Feldstein. Although the NBER publishes pertinent data and references its committee members, little is known as to how they determine recession or economic contraction, as they call it. To gain a proper understanding on their process, we summarize data gathered from their website:

  • The Committee does not have a fixed definition of Economic Activity and applies its judgment in determining the state of a given Economy.
  • The Committee focuses on five factors when determining a Recession:
    1. Real (after inflation) GDP
    2. Employment
    3. Personnel Income
    4. Retail Sales
    5. Industrial Production
  • The Committee, although starting in 1920, has gone back all the way to 1854 to analyze the business cycle – this was just before the end of the Civil War, by the way
  • Since 1854, (prior to the end of Civil War) there have been 33 Recessions
  • Since 1945, (the end of World War II) there have been 11 Recessions
  • Since 1945, the Post-War Era the average Recession lasts 11.1 months
  • Since 1945, the average Expansion lasts 58.4 months or 5.25X as long as Recessions

Think about this for a moment: the deep methodical nature of the Committee’s process sometimes allows for the official recognition of a recession actually after it is over. We view this very unique process somewhat compelling and actually find a “breath of fresh air” to its orderliness and well thought out manner; certainly, an anathema to what exists in the rapid-fire nature of the capital markets. However, because of the clandestine nature in which the Committee operates, it gives license to soothsayers to gauge what the Committee may or may not decide.

These clairvoyant and impatient prophets can’t contain themselves from making predictions on the expansion and contraction phases of the economy and willingly step into the shoes of the Committee, wanting to be the first to call a recession. We deem this type of action not only reckless on the part of these forecasters, but destructive to the everyday investor who likely does not have a sound investment strategy or work with a trusted financial advisor. So, are we doing anything different by suggesting we are not in a recession vs. those who say we are? I believe so and here is why:

  • Although we can’t sit in on the NBER Business Dating Cycle Committee meetings, we can glean from their 100-year history of richly documenting how they operate and what they consider each time they determine the status of the current phase of the business cycle.
  • Using the five factors of determination, we can get a basic understanding as to whether we are in a mode of Expansion or Contraction.
  1. Real GDP – expanding at an annual rate of +2.3% and positive for 20 consecutive quarters, this number would have to be negative for concern to be relevant
  2. Employment – there are more job openings than people unemployed for 20 consecutive months, and we have more jobs available than workers to fill them
  3. Personnel Income – with personal income rising 0.4% per month and the Savings Rate at 7.6%, the Consumer is in excellent shape
  4. Retail Sales – with Retail Sales growing at +5.8% on a year-over-year basis, the consumer is both saving and spending at a healthy rate – a great sign
  5. Industrial Production – this certainly is the fly in the ointment, no doubt, and the trade dispute and recent outbreak of the Coronavirus is to blame for this statistic on a year-over-year basis, which has been negative for four consecutive months. Although not ideal, it should be mentioned that from February 2015 to October 2016 Industrial Production on a year-over-year basis was negative for 20 consecutive months. And you know what; an official Recession was never declared despite this significant nearly two-year malaise in this area of the Economy.

The only one of the five areas considered by the Committee that has slowed is Industrial Production. If the Committee never declared a formal Recession in 2016 when Industrial Production declined for 20 consecutive months, why would they declare that we are in a Recession today when four months of contraction in Industrial Production have occurred on a year-over-year basis? In closing, we find it deeply irresponsible for any economist or analyst to flippantly toss around the word ‘Recession’ in a manner other than one that directly points to each of the five factors used by the sole determiner, the NBER Business Cycle Dating Committee. For if one were to look at the aforementioned Big 5, there is no way in which your conclusion could be that we are in a Recession or anywhere near one. Clarity, as always, is the only remedy for the Recession Obsession!

*All data sourced from

Chuck Etzweiler

Chuck Etzweiler

MBA, CIMA®, CFP®, CMT, Chief Research Officer & Senior Vice President

With more than twenty-five years of investment industry experience, Chuck directs the on-going research efforts of the firm, much of which help both advisors and clients understand the philosophy and strategy of Nepsis, Inc. in a deeper manner. A high percentage of the focus of the research is centered around money manager pitfalls, investor short-comings and repetitive behavioral biases that detract clients from earning optimal returns.

Prior to joining Nepsis, Chuck worked as Chief Market Strategist for True North Global Research and as a Securities Analyst with both Wells Fargo and the Bank of Hawaii. Additionally, Chuck has earned the CFP designation and is a Chartered Market Technician. Chuck is a graduate of Syracuse University and also has earned his MBA in Finance.

Chuck is an active member of the CFA Society of Minnesota, the Market Technician’s Association and the Investment Management Consultants Association.

Chuck was raised in Allentown, PA and now lives in California with his wife and two sons.



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