Returning to Normal: How Long the Economy Takes to Return to Pre-Recession Levels

When the COVID-19 pandemic began, most of the economy was brought to a near-immediate standstill or a significant slowdown. With everyone on Wall Street and Main Street asking when and how it will end, there was no doubt a recession was here before the National Bureau of Economic Research (NBER) officially declared it June 8.As described by the NBER, recessions are a “significant decline in activity” that’s visible for a number of months in economic measures, such as employment, industrial production and income. Conversely, when declines in these measures reverse direction, the recession is over and a new economic expansion begins.

But for many people, the end of the recession is only half the story. Just because the recession has ended doesn’t mean the economy bounces back at the same rate it declined. While we can’t pretend to know how the 2020 recession will shake out, we can look at data from some of the more recent recessions, which show not only the lengths of recessions from the past 50 years, but also how long the economy took to get back to pre-recession levels.

To do this, MagnifyMoney compared metrics that measure five components of economic activity — employment levels, consumer spending, income (on a per person basis), industrial production and gross domestic product (GDP) — similar or identical to those the National Bureau of Economic Research (NBER) Business Cycle committee uses to determine when recessions begin and end. We then mapped how long each of these measures took to get back to the levels they were at prior to the onset of the last six recessions.

In addition, we looked at stock performance around recessions. Although the NBER does not factor stock prices into its analysis of the business cycle, the market often gets credit — albeit sarcastically so — for being a leading indicator: according to famed economist Paul Samuelson, it has “predicted nine of the last five recessions.”

Key findings

• Getting back to pre-recession levels takes at least as long as the recession itself, as measured by key indicators that economists use to determine if we’re in a recession.
  • Recessions since 1973 lasted an average of 12 months, but for the economy to return to pre-recession levels, it took an average of 22 to 36 months to fully recover, as measured by personal incomes, consumer spending, industrial production and employment.
• Industrial production takes the longest to completely recover, averaging 36 months over the past six recessions.
  • Employment levels have taken an average of 32 months to return to pre-recession levels.
  • Real incomes return to pre-recession levels the fastest. It’s taken 22 months on average for Americans to get back to pre-recession income levels since 1973.
• We also looked at U.S. stock prices during and after these six recessions. Data indicates that stocks either recover almost immediately, as they did in 1980, 1982 and 1991, or take between three to five years to completely recover, as they did after 1973, 2001 and 2007.
• The 2020 recession began in February. So far, most indicators are still falling, although stocks and personal income have rebounded.

Recessions since 1973 have been mild, severe and middling

Since 1973, the U.S. economy has endured six recessions, according to the NBER, the semi-official arbiters of declaring when recessions begin and end. On average, the six recessions have lasted for 12 months, though they’ve been as brief as six months and as long as 18 months.

The end of the recession isn’t the whole story though. Even when comparing brief recessions, sometimes jobs will quickly return (as they did in 1980), and other times, like in 1990-91, jobs won’t immediately return, leading to so-called “jobless recoveries.” And sometimes, after a deep recession ends, like that in 1981-82, most economic indicators quickly rebound; other times, like the most recent Great Recession in 2007-09, some economic measures like employment and income took years to return to a pre-crisis level.

Scenarios like these are why the financial media often adopts a shorthand to describe potential economic recoveries, such as V-shaped or U-shaped. What’s being described by this shorthand isn’t the recession itself, but a summation of the economic picture both during and after the recession. To borrow from the examples above, the 1990-91 recession would be described as U-shaped — where unemployment was a persistent problem even after the recession ended.

Looking at the recovery times of these economic indicators, it’s clear that the 2007-09 Great Recession has earned its title, as every economic measure took longer to recover than in the five preceding recessions. But determining which recession was mildest may depend on your perspective. For consumers, it appears the end of the double dip recession in 1982 was the mildest, as double-digit inflation came to an end and real incomes increased.

The metrics economists use to gauge economic health

When determining economic conditions, economists consider many monthly economic measures. While sometimes one or two of the measures may experience a temporary dip, if most of the other indicators are increasing, the economy is considered to be in a state of expansion. However, when most of these indicators drop simultaneously, a recession can be considered at hand.

Here’s how some of the indicators behaved during the past six recessions:

• Gross domestic product (GDP): GDP encompasses all the consumption, investment and government spending occuring in the U.S. economy. So if GDP trends lower, it’s clearly a tipoff that a recession is at hand. (However, it’s not necessarily the case that two or more consecutive quarters of negative GDP is the definition of a recession, according to the NBER).Of the five economic metrics we measured, GDP fully recovers the fastest, on average. The quickest GDP turnaround was after the 2001 recession, when GDP exceeded its March 2001 peak in just nine months. However, in the most recent 2007-09 recession, it took 40 months for the economy to get back to where it was prior to the recession in December 2007.
• Income: Personal incomes fall during recessions as unemployment levels increase, and generally rise during economic expansions as workers return to work. During the tech bubble recession of 2001, incomes recovered relatively quickly, taking only nine months to get back on track. It took 47 months for incomes to recover after the Great Recession.
• Spending: Consumer spending naturally falls as incomes decline during recessions. But the length of time it takes for consumer spending to return to pre-recession levels appears to vary considerably, especially after you account for inflation. In two recessions, 1981-82 and 2001, consumers almost immediately began to reopen their change purses or pull out credit cards. But in other recessions, like in the 1973-75 and 2007-09 recessions, it took 35 and 61 months, respectively, for consumers to consume at the same level they did before the recession.
• Employment. Employment appears to be the one metric that takes longer to recover with each ensuing recession, no matter how long or brief the actual recession was. So even though the 1973-75 recession was a relatively long 16 months, it only took 18 months for employment levels to reach pre-recession levels. After 1980, each employment level recovery took longer than the last one, ending up with employment levels not recovering after the 2007-09 recovery for an astonishing 78 months.
• Industrial production: Although it doesn’t directly impact the American consumer, economists watch industrial production levels, as it’s a reliably cyclical indicator to determine if a recession is at hand. Industrial production also takes the longest, on average, to return to a pre-recessionary level, which has averaged 36 months over the past six recessions. In the 1973-75 and 1990-91 recessions, it took 20 months for industrial production to completely rebound. After the Great Recession, though it took 78 months to return to pre-recession levels.

Economists don’t factor in stock prices when determining if a recession is at hand. But stocks do decline during recessions, so clearly some information about economic health appears to be available in stock prices. However, it may not be completely reliable, especially for forecasting the end of recessions.

We looked at the total market capitalization of U.S. stocks (that is, the total dollar value of all stocks trading in the U.S., as valued by investors in a particular month) to see, as with the other economic measures we examined, what it could tell us about economic recoveries. What seems most apparent, however, is that stocks track secular bull and bear markets more than they track month-to-month economic conditions.

For example, it took only 17 months or less for stocks to fully recoup their losses after the recessions in 1980, 1981-82 and 1990-91, dates that occurred immediately preceding or during the 1982-2000 secular bull market, a decades-long cycle where stock prices tend to increase.

Conversely, stocks after the 1973-75, 2001 and 2007-09 recessions took between 44 and 59 months to recover. These periods were during what were widely considered secular bear markets, when stocks prices are either stagnant or in decline.

The 2020 recession begins

In June 2020, the NBER declared that the 2020 recession began in February. GDP, incomes, industrial production, personal consumption and employment have all initially declined from their respective February levels, sometimes at a record rate. As we’ve shown above, all of these measures declined at some point during each of the past six recessions.

Currently, except for per capita income, all key indicators remain lower than they were in February. Income is an exception due to the unprecedented one-time stimulus check most Americans received in April, as well as an $600 per week enhanced unemployment benefit laid-off workers received, which actually increased take-home pay for some. However, with the enhanced unemployment benefit due to expire July 31, income levels may no longer stay above the pre-recession level come August.

Methodology

In May 2020, MagnifyMoney calculated how long it took key economic metrics to return to pre-recession levels over the past six recessions as denoted by the National Bureau of Economic Research (NBER). A metric was determined to have returned to a pre-recession level the first month after the recession that a level was higher than its highest point during the recession.

Stocks are measured in nominal dollars, other dollar denominated metrics, while GDP, income and personal consumption are measured in real terms. All dollar-based metrics — GDP, income per person and spending — are adjusted for inflation.

Sources include NBER (Recessions and GDP), Macro Advisers (GDP), Bureau of Economic Analysis (Real Disposable Income per Capita and Real Personal Consumption Expenditures per Capita), the Federal Reserve (Index of Industrial Production), the Bureau of Labor Statistics (Employment Level based on the monthly Household Survey) and Wilshire Associates (market capitalization of U.S. stocks).