Business Contractions by Month-of-Decade
I went through the last 15 decades (actually starting in 1855, when the NBER dating starts, and ending in 2004 to give an integer number of total decades) and calculated the frequencies of business cycle contractions (using the NBER dates) for each month of the decade. For example, January of the “zero” year is the first month, February of the “zero” year is the second month,…,January of the “one” year is the 13th month,…,January of the “two” year is the 25th month, and so on. (You can click on the picture to see a larger version.) These results are purely empirical and may not mean anything, and I’m not sure how to do statistical tests on them, because I find it hard to make a rigorous distinction about what is a sensible hypothesis to test.
But there is at least one thing that seems hard to attribute to chance: the highest frequency of contractions is just after the beginning of the decade, and the lowest frequency of contractions is just before the end of the decade. Since 1855, there has been only one contraction that included the second quarter of a "nine" year (1949). Whereas in 10 out of 15 of the "zero" years, at least November has been a recession month. And at least 3 of the remaining 5 are not very impressive: November 1940 wasn’t a contraction, but the nation was still recovering from the Great Depression, so it wasn’t exactly business as usual either; November 1980 technically wasn’t a contraction, but it was part of a very short expansion sandwiched between two contractions; November 2000 wasn’t a contraction just yet, but as I recall, the winds of recession were in the air. (Maybe somebody who knows the history better than I do will have stories about 1880 and 1950.)
If we take this chart seriously as a prediction for the future, it has an interesting implication for the present time. There is a peak late in the “seven” year, after which the chance of contraction drops rapidly. That suggests that right now is a critical time to avoid recession, and if we can get through the next few quarters without one, we can expect smooth sailing for the remainder of the decade.
The chart may also be depressing for Democrats and heartening for Republicans. During the first few months of President Obama’s term, it will look like he inherited a strong economy. Then once the unimpeded Democratic initiatives are implemented, it will appear that they are destroying the economy. The trick, though, for a Democratic president, will be to reduce initial expectations and have people expect a longer-run payoff. That seemed to work for Reagan, anyhow. Alternatively, one could hope that the recession will be as shallow as possible and the recovery as strong as possible, which worked for Nixon. My advice to the next president is to figure out now a way to blame 2010 on Bush and then save your real economic ammunition for 2011 and 2012. With any luck, it could be the second Clinton boom. (As per tradition, Clinton will be facing a Republican congress.)