Are recessions normal in an abnormal economy? Not quite >>> Read more in the Nashville Business Journal here.
In the March 2025 edition of the Nashville Business Journal, John Norris, Chief Economist, discusses why a normal recession won’t work in an abnormal economy.
It has been a very long time since the United States had a normal recession.
Sure, we shut everything down in the spring of 2020, and the economy collapsed. That was definitely a recession – a horrible one – but it wasn’t normal. For its part, the Financial Crisis of 2008-2009 also wasn’t what anyone would call typical. The entire global financial system almost collapsed.
Again, not normal.
And the recession prior to that back in 2001? This was on the heels of the Y2K panic and the subsequent collapse of business investment. 2001 became an even more challenging year for the U.S. economy after the September 11th tragedy. In truth, nothing about that year seemed normal.
Interestingly, a quick study of U.S. economic history suggests that normal recessions are the exception to the rule. There always seems to be some sort of shock to the system that grinds activity to a halt.
It could be a virus. Troubles in the banking system. A tech bubble. A tyrant on the other side of the world could invade a major oil producer. The Fed could kill inflation by killing the economy like it did in the early 1980s. OPEC could shock the supply of oil in the global economy, and Richard Nixon could shock the global payments system.
Yep, there always seems to be something. So much so, you really must go back to the recessions of 1960-1961 and 1969-1970 to find examples of normalcy. You know, the sorts of slowdowns the professors draw up in business school.
These are when the governing authorities attempt some measure of fiscal constraint, and the monetary authorities keep money more expensive than necessary for longer than necessary.
Fiscal policy and monetary policy restraint. This is also known as having less money sloshing about in the economy.
Isn’t that what is happening right now?
Basically, yes.
Depending on your point of view, the first several weeks of the second trump administration have been either invigorating or infuriating. They certainly haven’t been boring. However, will all the upset apple carts ultimately be good for the country? Will slashing the Federal bureaucracy and eliminating what the administration views as wasteful or inefficient produce beneficial results?
In the short-term, I am sorry to say, I don’t believe it will. Eliminating potentially hundreds of thousands of jobs without incurring some kind of negative result is very unlikely. Further, that so-called inefficient spending is going somewhere. Someone is spending it – and that generates economic activity, even if it is less than ideal and inefficient.
So, the more you cut, the less money there will be sloshing about in the economy. as you can imagine, more money in the system is almost always better than the alternative.
Now, the longer term? Yes, getting Washington’s deficits under control should be good for the U.S. economy. If for no other reason than the Federal government seems to use leverage very poorly. Over the past decade, it has borrowed substantially more than the entire economy has grown. We are talking about trillions of dollars.
As for monetary policy, the Fed has kept the overnight rate significantly higher than the offical inflation gauges for a pretty long time. Currently, the gap between the upper range of the Fed Funds rate and the trailing 12-month Consumer Price Index is 1.50%.*
To put that into perspective, over the 15-year period from the start of 2008 through the end of 2023, the spread between inflation and the Fed Funds target was negative 147 out of 180 months. That means it remained in negative territory 81.7% of the time.*
So, by recent standards – stretching back to the start of the Financial Crisis – today’s monetary policy is relatively restrictive. Throw in Elon Musk and DOGE, and you have the traditional recipe for a short-term slowdown in economic activity.
This being fiscal policy and monetary policy restraint.
Don’t get me wrong. For the long-term health of the U.S. economy, both are extremely necessary. However, weaning the economy and U.S. consumer off government largesse and free money won’t be without a little pain.
But how much? Well, how many of you immediately think of those two milk recessions from the 1960s when you think of economic downturns?
Yeah, I didn’t think so, but those are our probably worst-case scenarios unless something abnormal happens.
Unfortunately, that is ordinarily the case.
Chief Economist
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