Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner


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Victor Niederhoffer



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The Duration and Prevalence of Recessions

According to the official data, the economy has spent 57 months in expansion since the last recession ended in March 2001. The data from NBER permit the derivation of a table that puts the recent paucity of contractions into perspective:

Decade          Months in Contraction
1900-1909       48
1910-1919       54
1920-1929       50
1930-1939       51
1940-1949       19
1950-1959       18
1960-1969       11
1970-1979       26
1980-1989       22
1990-1999       08
2000-2009       08*

NBER summarizes similar information in an average contraction and expansion time from 1945 to 2001 of 10 and 57 months, respectively, versus average contraction and expansion times of 20 and 40 months in previous cycles. The old way of measuring recessions was a decline of two consecutive quarters in GNP. This has been superseded by monthly work that takes account of the three Ds of recessions: duration (how long), depth (how much) and diffusion (how many industries suffered declines in employment).

Another line of approach is real business cycle theory, which attributes the movements in output to rational responses to external shocks caused by productivity gains and losses in the economy. Such an approach would look to the changing value that workers place on leisure as opposed to work and the changing pace of technological progress as the key factors causing these changes in output.

Several questions emerge. Are these data completely consistent with randomness -- with, say, a quarter-percent per month drift and a standard deviation of 0.25%?

Since the last trough occurred in March 2001, 57 months have passed. The expected lifetime for continued expansions conditional on having reached that number is an additional 34 months (note that the March 1975 to January 1980 expansion lasted exactly 58 months, thereby lowering the average current conditional lifetime). Have recessions become smaller in duration and depth in recent decades? Would an analysis of such factors as hazard rates and conditional lifetimes of monthly rises and declines in the stock market classified by duration, depth and diffusion among companies along the lines of the out-of-date business cycle theorists provide employment for those theorists or profits for the cross-the-fields researcher?


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