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December 2, 2008

The Trouble with Recession Averages

Consider the following lovely chart (via Barry (via Financial Philosopher)). It's cute, and helpful-ish, but it also points to one of the problems with all the current chatter about how long the average recession runs. Scan it first, and my commentary follows.

In looking at the above chart you could argue that we have a cluster of recession duration data, and an outlier (the Depression). In the preceding case the use of an overall average makes sense. Recessions are the thing, so let's average those durations and not get sidetracked.

You could also, however, argue that we have a bimodal distribution, with one average duration for downturns unrelated to the long-term credit cycle, and another longer duration for small-sample downturns representing unwinding of said cycle. I lean toward the latter view, and thus think most of this discussion of recession durations is unhelpful and not nuanced.

As a reminder, the following is the U.S. long-term credit cycle chart (from SocGen):

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