US business cycles: past, present and future.
Lazzat Davlet, PhD.
Introduction
It is well known that the economy is cyclic and there are many different cycles: long-term, middle- and short-term cycles. Long term cycles usually last about 50-60 years and some researchers believe they depend on the price of oil, gold or other goods. There is also a theory that long cycles are the result of new waves of innovations in the economy. Most middle and short cycles are caused by changes in consumer’s behavior in the market and huge resources are spent every year to predict these changes. The whole market is the result of millions of individual’s activities, business people including who mostly behave unconsciously. No matter how much unconscious behavior was studied, it is almost impossible to predict it without involvement of influence from forces outside, from geographical and astrological influences in particular.
Lately analytics has noticed that the market more and more depends on physiology because panic became the reason for many crisis and downturns of the economy and the stock market in the US and whole world. It is said that recessions begin and end in the 'minds of men'. Mass media broadcasting all negative news globally multiply fears and worries and high speed of modern style of life unbalancing people`s nerves create even more reason for panic.
1. Retrospective analysis of bearish eras and downturns in the US stock market.
We had tried to analyze middle–term business cycles of the US economy in the past, present and forecast the future. The tracking of this influence during the business cycles is estimated by average annual return on stocks before dividends. James T. Kahn in his article about the history of business cycles in the USA found 9-bullish eras averaging 10.5 years and 8-bearish years lasting about 14.5 years.(2). Average annual return during these years was minus 5.8% before dividends and followed by high inflation.
Table 1.Bearish eras of US economy and market
Business cycle Years lasted
- 1802-1829 27 years
- 1835-1842 - 7
- 1847-1859 - 12
- 1872- 1877 - 5
- 1881 – 1896 - 15
- 1902 – 1921 - 19
- 1929-1942 - 13
- 1966-1982 - 16
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Besides these business cycles there are downturns, bubbles and panics which happen during the bearish eras. Most of them lasted about one year:
Table 2 - Short –term downturns of US economy and market
Downturn Time lasted
Canal bubble 1825- 1826
Depression 1837- 1838
Panic 1842
Downturn 1853 – 1854
Banking crisis 1857 – 1858
Gold panic 1869 – 1870
Panic 1890
Panic 1902
Downturn 1987
Other panics not included in list by Kahn are:
Railroad bond defaults panic 1857
Vienna stock crash panic 1873
New York banks panic 1907
After this panic FED was created to prevent such events in the future. (3)
1972-74
This time the markets plunged 49% over 21 months and caused a downturn from 1973 to 1974 (4)
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There are also yearly downturns, which repeated almost every 4 years from 1926 to 1994.
Only the 50th were missing these downturns every 4-years probably because of steady growth after the war.
Bullish eras were observed from the year 1792 and some of them are presented in Table 4.
Table 4 - Bullish eras of US economy and market
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Business cycle Years lasted
1896- 1902 6 years
1942 – 1966 24 years
1982- 2000 18 years
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The longest bullish era lasted 24-years and last one 18-years. The beginning of the second era in 1942 was probably mostly connected to war time expansion. On average, bullish eras last about 10-years only, though most people don`t know about that and continue investing in stocks after the end of these ears. This causes financial problems and collapses for individuals and society as a whole.
2. Current business cycles in US economy and forecast.
Economic science provides a lot of tools to regulate the market, such as with taxes, interest rates, budgeting, and law in the field of investment, etc. In ‘90’s most people started to believe that it is possible to manipulate the market with regulation and totally avoid inflation, deflation, crisis and recessions. Deregulation in telecommunications and the IT industry lead to high investments and growth of the economy. People became sure that growth would be constant and unstoppable. Utopia created euphoria all over the world when business people didn’t pay much attention to consumer’s physiology. For example, consumers didn’t want to switch to internet only shopping and the high tech bubble growing from 1995 suddenly broke in 2000. Thousands of companies went bankrupt, the unemployment rate increased and economic growth slowed down.
Before that there were other reasons for the bubble: excess investment in US market due to the crisis in South East Asia, which lead to the crisis in developing markets. This crisis in itself was the result of panic in South East Asia, which spread rapidly as an epidemic.
Further events were unpredictable and damaging too. September 11, 2001 terrorist attack caused a deep crisis in tourism and the transportation industries, along with increased unproductive expenses to defense, security and insurance. War in Iraq created instability in people’s minds too, and later even depression because it was unexpectedly long. Corporate scandal caused panic and lasted for a long time causing the reduction of market stock prices, which are estimated to equal 7 trillion dollars. The trust in the magic of the market and good will of business diminished creating the base for more panics. Millions of people in the US removed money from pension funds and stocks to put them into bank accounts, buy property, or other safe havens.
Greed became casual and people started to invest in real estate even if they couldn’t afford it, which was aided by the government's regulatory reforms to enable low income people to purchase housing that they could not hope to pay for. As a result the housing bubble started to grow even before 2000. Due to demand, the price of housing skyrocketed especially in metropolitan areas of the country. Over consumption lead to more investment in new construction, furniture, automobiles and other household merchandise markets, which were leveraged on the rising equity of these purchased homes.
Now we can see the burst of the housing bubble and its consequences. The banking crisis and other stock market panics were following one after another in 2008. In November 2008 the recession was announced officially.
This panic was somehow calmed down by bailout measurements and change of power.
We can add other business bubbles and downturns to list of above:
Table 5 - Recent business bubbles in US economy
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Business bubble Years lasted
High tech bubble 1995-2000
High tech bubble burst 2000-2002
(During this burst the S&P 500 alone fell 50% over a 30 month period)
Downturn after 09/11 2001
Corporate scandal panic 2002
(This time stocks market was reduced to 7 trillion dollars.)
Panic (stock market) 2008 October 2009
Burst of housing market 2008 2015
The fall of oil prices 1/3 of July prices 2008 December
Stock market panic 2011
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The year 2008 was the most dramatic and full of downturns. First time it happens in January- February 2008 but in October 6 – 7 the down turn was even stronger. On the morning of October 6th the US government’s vaunted $700 billion rescue plan barely slowed down the market meltdown. This panic caused $ 6.5 trillion in global stock market losses. In the US it caused a 33% reduction in S&P 500 indicator.
(5). Even government officials admitted their worries. It was another panic on financial markets, which was to be calmed somehow later. In the year of 2009 market was slipping down due to many reasons: continued burst of housing market, political reasons and lack of trust in market from investors and consumers.
It was expected that in 2010 the housing crisis and stock market crisis would be reduced and at the end the US would overcome it. As we already seen, it is not the time when security and stability is guaranteed by astrological research.
Simple math showed that the bearish era is not over, but it may finish in a few years. If we place the beginning of the bearish era in the year 2000 when high tech bubble burst started, we can hope that the bearish era will end in the year 2015. It is because bearish eras last on average of about 14 years. But it is only an average and this bearish era could last longer. It is depend on political and economic environment and this can change after election in 2016.
We can forecast that next year 2012 will not be an apocalypse year for the US market or that no one major disasters will happen this time. But 2012 might be not so good for Europe's countries and China’s markets. Only in the year 2013 we can expect serious troubles. Downturn could happen during the year 2014. But in general we can expect that a bullish market starts in 2017. But coming bullish eras will not be strong as previous eras and will probably not last long.
The conclusion is that we can see many problems of past decade influenced by panics, downturns, terrorist attacks, scandals, decline in economy and unemployment, rise of poverty and natural disasters. Most of problems startув long before unfavorable time and gradually reduced during туче decade.
Therefore we can`t expect serious improvement during current decade but we can hope maybe we'll get lucky and panic will not last long. But it is clear that some changes and adjustments are needed to help with transition of market to new transformation. It will not be just change in political power it should be gradual and smooth transition to more stable market system that is more suitable for modern collective mind. Otherwise the downturns and panic could cause other disasters in US market.
Sources:
1) Robert Samuelson, The Economic Blame Game/ Newsweek, August, 26, 2002
2) JAMES T. KAHN, VIEWS FROM BEYOND THE BARRON'S STAFF, Barron’s, Copyright Dow Jones & Company Inc Oct 21, 2002
3) John Cloud, The Moment,
4) Justin Fox, Time, June 15, 2009
5) Peter Gumbel, The Meltdown Goes Global, Time, October 20, 2008
6) National Bureau of Economic Research, Inc.