It's now been about a year since the U.S. economy turned upward, and investors are wishing the recovery was going more smoothly. Economic growth isn't quite as strong as it was earlier this year, unemployment remains stubbornly high, and stocks have been in a correction for the past four-and-a-half months. All that, many say, is proof the recovery is about to give way to another bear market.
But recoveries are never smooth and easy. I've recently researched a number of past economic expansions. I found the current U.S. turnaround - with all its shortcomings - is in a lot of ways a pretty normal one.
For starters, look at the stock market. Corrections are a normal part of bull markets. In fact, every bull of the past 50 years has had at least one correction of at least 10 per cent.
Some have had multiple corrections. The bull that followed the difficult 1973-75 recession had at least five, one of which pushed stocks down 19.4 per cent. The bull that began in 1957 featured a correction that lasted 14 months. The bull that started in 1982 included a downturn that lasted almost 10 months - after which the market surged 127.8 per cent over the next three-plus years.
Economic growth rarely heads straight upward either. It's true that growth of U.S. gross domestic product has slowed in the past two quarters (it grew at 5 per cent annualized in last year's fourth quarter, 3.7 per cent in this year's first quarter, and 1.6 per cent in the second quarter). But that deceleration is far from unprecedented.
In the first full quarter following the end of the 1990-91 recession, GDP rose by 2.7 per cent, then growth slowed to 1.7 per cent the following quarter, and 1.6 per cent in the quarter after that. In the first three quarters following the 2001 recession, GDP growth went from 3.5 per cent to 2.1 per cent then to 2 per cent - in both cases showing the same deceleration we've seen recently.
In terms of magnitude, this recovery is in the middle of the pack. If, as it appears, the recession ended in the summer of 2009, the economy has averaged 3.4 per cent growth per quarter in the first three full quarters of the recovery. That falls in between the pace set by the post-1991 and post-2001 recoveries (which averaged 2 per cent and 2.5 per cent, respectively), and the post-1975 and post-1982 recoveries (which averaged 5.1 per cent and 7.5 per cent, respectively).
Manufacturing activity paints a similar picture. According to the Institute for Supply Management, the manufacturing sector has been expanding for 13 successive months. Critics point out that the rate of expansion isn't as rapid as it was back in the spring. But manufacturing growth can't continue to accelerate forever. Following the recessions that ended in 1975 and 1982, manufacturing activity started on lengthy streaks of expansion. But in both those cases, the rate of expansion peaked and then slowed within a year - just what we're seeing now.
To be sure, the unemployment rate has remained stubbornly high since the recovery began. But that's nothing new. In the recovery that followed the harsh 1973-75 recession, unemployment actually increased for a couple of months after the recession had technically ended, before finally peaking at 9 per cent in May 1975.
What happened then? Unemployment began to decline - but slowly. Six months after that peak, in November, 1975, it was still quite elevated, at 8.3 per cent. Nine months after, it was at 7.7 per cent. By May 1977 - a full two years after unemployment had peaked - it was still at 7 per cent.
An even tougher period for employment was the recession that ended in late 1982. After peaking at 10.8 per cent in November, 1982, unemployment dipped only slightly over the next six months, to 10.1 per cent. Nine months after the peak, it was at 9.5 per cent. Two years after peaking, it was still above 7 per cent.
The unemployment rate has declined a bit more slowly in the current recovery, peaking at 10.1 per cent and then falling to 9.9 per cent after six months and 9.5 per cent after nine months. But the general pattern is holding true. Once particularly bad recessions end, unemployment doesn't plunge downward. Often it takes years before returning to levels we consider low.
Is this recovery different from past recoveries? Of course it is. Every recovery has unique twists, but the data show it might not be as different as you think. Sir John Templeton, the legendary investor, was fond of saying that the four most dangerous words in investing are, This time it's different. Investors who've been fleeing the market should remember Templeton's sage advice.
John Reese is founder and CEO of Validea.com and Validea Capital Management, and portfolio manager for the Omega American & International Consensus funds.
John Reese