Are recessions really predictable? Rethinking economic 'common sense'

Luke Bartholomew:
Hello and welcome to Macro Bytes, the economics and politics podcast from Aberdeen Investments. My name is Luke Bartholomew.

Paul Diggle:
And I'm Paul Diggle.

Luke Bartholomew:
And today we are joined by Tyler Goodspeed. Tyler is the chief economist at ExxonMobil and a Griffin Fellow at the Hoover Institution at Stanford University. He previously chaired the White House Council of Economic Advisors and held faculty appointments at Oxford, King's College London and Stanford where he was the Kleinheinz Fellow at the Hoover Institution. And most importantly for our purposes today, he is the author of the recently published book, Recession: The Real Reasons Economies Shrink and What to Do About It, which is the book, if you are listening, that I am currently waving on camera, which is a fantastic study of several hundred years of economic data from the US and Britain, which Tyler uses to draw some very interesting conclusions about the nature of recessions and their causes, which I think challenge some lazy cliches you often hear about how the economy works and I think offers some important lessons for our current juncture as well. So Tyler, welcome to the podcast. Thanks so much for joining us.

Tyler Goodspeed:
Great to be with you, Luke.

Luke Bartholomew:
Okay, so we want to start by putting to you a series of statements, claims, theories that are often made about recessions and business cycles. And I use air quotes there for reasons we will no doubt get into in due course. And I think some of these statements represent something like folk wisdom, some financial market heuristics, and some I think are basically academic consensus. But if you work in and around macroeconomic forecasting these are all ideas that you would have heard at one point or another. And I think what it'd be great for you to do is say, in turn, whether they are true and false and why. I suspect similar data might speak to several of these claims. They're a little bit overlapping, but still nonetheless I think it'd be helpful to take each one in turn and say why they may or may not stand up to scrutiny.

So the first claim I want to put to you is this.

Business cycles move through recognisable phases with distinct economic and market properties. So there's something like an early cycle, a mid-cycle, a late cycle, they are all identifiable, and then recession is the natural final stage of that sequence.

Tyler Goodspeed:
False. One of the things that struck me in the book was how many early business-cycle theorists, as you correctly use the air quotes, were actually initially trained, originally trained as physicians, and they would speak about economic fluctuations in distinctly anatomical or biological terms. So Sir William Petty, he was an early business-cycle theorist in the United Kingdom. He talked about cycles of dearths and plenties and he described his ability to analyse an economy as analogous to analysing human anatomy. Clément Juglar, another early French business-cycle theorist, he used terms such as malady, crisis, remedy to describe economic fluctuations. He wasn't a physician, but the late great MIT economist Charles Kindleberger described the biologic regularity with which economies fluctuated through cycles of mania, panic, and crash. The good thing about this approach is that it is in at least one sense scientific in that it yields certain testable, empirically testable and falsifiable hypotheses. Because if this is the case, then there should be some information in the contours of an economic expansion, the volume of the increase in bank lending, for example, or the speed of the increase in economic activity that should inform the probability and contours of the subsequent recession. But the reality is that when you interrogate, as I do in the book, four centuries of economic data on both sides of the Atlantic, there's simply no information in the contours of an economic expansion that tells you anything about the probability or the contours of the subsequent recession.

Paul Diggle:
Yeah, and these terms, early cycle, mid cycle, late cycle, we encounter them all the time in the context of financial markets. So many financial market practitioners will want to say we are in the late cycle and a certain pattern of asset price moves is therefore possible or likely, but more often than not, as we'll get into, these are reading in possibly patterns into the data that don't necessarily exist. But I mean, the next statement then, Tyler, we want to put to you is: expansions and recessions are best understood as oscillations around an underlying trend growth path. So booms pull activity above trend, recessions push it below and the economy subsequently mean reverts. True or false?

Tyler Goodspeed:
False again. So under that oscillationist view of economic fluctuations, you would expect that the height or the speed of an economic expansion should predict the depth or the speed of the subsequent recession, but that the depth and speed of a recession should bear no resemblance to the height and speed of the subsequent recovery. When you test the data, it turns out that that's not the case, that the depth and speed of a recession is entirely unrelated to the height and speed of the preceding economic expansion, whether you're measuring with bank credit or investment or consumption or GDP. However, it turns out that the opposite is actually true. So deeper, faster recessions are succeeded by higher, faster recoveries. And that's a pattern that holds across time and across the Atlantic. And so the model of economic fluctuations that's consistent with that is what Milton Friedman described as a plucking model. So economic fluctuations are not about economies that are growing too fast, too much above potential, and then you have the inevitable retrenchment. Rather, they're about economies that are growing pretty much in line with their long-term trend. And then you get some adverse shock. The economy temporarily deviates from that trend. But then rebounds back to trend as if it were never interrupted by that adverse shock. And just really quickly, you mentioned financial markets and there's a key distinction here because I lean more toward the efficient markets, rational expectations view of markets. I don't dispute that a really savvy investor who really does his or her homework can correctly predict and make successful bets on market turns. That is distinct from them bundling that prediction with a separate, possibly related prediction, but a separate distinct prediction that therefore there will be a recession. So I think there's that crucial nuance there.

Paul Diggle:
Of course, people have wanted to read in patterns to economic time series, as well as financial market time series for as long as there's been people doing economics. And often it's spoken about as a sort of series of overlapping different patterns or waves over different time horizons and perhaps bundled together, they then create the so-called business cycle. But there are ideas of a sort of an inventory cycle over a short time horizon, maybe three to five years. The idea of a Kuznets cycle, which is sort of maybe 20-year housing, investment-driven cycles. There are Kontratiev waves, these 50-year plus cycles in the data. People like Ray Dalio, one of these very savvy macro investors, talk about 80-year debt super cycles. There are supposedly century-long geopolitical and hegemonic cycles. So when people talk about those apparent cycles in the data, do they exist or not?

Tyler Goodspeed:
They do not exist. So one of the benefits of analysing four centuries of data is that you have a lot of recessions to study. So my sample has 132 recessions in the United Kingdom and United States. And with all these different wave or cycle hypotheses, whether it's inventory cycles of three to five years or longer investment cycles of seven to 10 years, or as you note, really long technology waves of 50 to 60 years there should be some information in lagged recession indicators that should predict the probability of a recession today. So if there was a recession 50 to 60 years ago, then there should be a higher probability of recession today. If there was a recession seven years ago, then there should be a higher probability of recession today. The reality is that the estimated, not to sound to be too technical, but the estimated coefficients on all those lags are zero. And I think this points to one, and you alluded to this in your question, I think this points to a common feature of our cognitive wiring that is known as an apophany or apophanous thinking. So it's the opposite of an epiphany. We have this as pattern-seeking mammals, we have a tendency to try and relate incoming stimuli to observed subsequent experiences, even trauma. And this serves us well in a lot of contexts. You imbibe stagnant water and you get ill, or you eat colourful mushrooms, you get ill, you get excess exposure to sun and you get a sunburn. And so too with the experience, even the trauma of recessions, do we try to relate that causally to some proximate action or actions that we might subsequently endeavour to correct. But the reality is that recessions are fundamentally about random shocks. And there's, I live in Texas now, there's a related apophanous fallacy called the Texas sharpshooter. So a Texas sharpshooter fires a bunch of rounds at a wall. And then he goes and draws a circle around the densest concentration of shots. And I think sometimes we tend to do that with business cycles in that we see, okay, it looks like six or seven years on average, so there must be some cyclical process here. But the reality is that recessions are about shocks.

Paul Diggle:
Yeah, I like this idea of the pattern-seeking mammal that we want to find patterns, that's a sort of heuristic that in an evolutionary sense has served us well, but perhaps not in the context of a system as complex as an economy. And it strikes me as well that the form of data smoothing that economists use, things like Hodrick-Prescott filters, they're actually, again not to get too technical, but for those of our listeners who are perhaps familiar with those kind of tools, within the statistical methods themselves, they sort of force patterns into the data in some ways and they perhaps also make cyclical fluctuations look more like they're a feature of the data than they really are.

Tyler Goodspeed:
I say this as a proud user of Hodrick-Prescott filters, of Hamilton filters. They are at the end of the day, sort of sophisticated moving averages and you have to make some judgment calls about what smoothing parameter you use. What I should note is that one of the early economists to recognise the potential randomness of economic fluctuations was ironically a Soviet economist working in Moscow and writing in 1926, a fellow by the name of Eugen Slutsky. So this is at the same time that economists in Britain and the United States are trying to come up with theories for how economic fluctuations, recessions, are the inevitable consequence of market processes. And in fact, it was a Soviet economist in Moscow who took old Imperial Russian lottery ticket numbers and constructed a moving sum of those digits. And the resulting series mapped almost perfectly onto a nearly 50-year index of British business conditions. And what that demonstrated was that the summation of chance or random causes can generate what looks like cyclical behaviour, even though the underlying data-generating process is in fact random.

Paul Diggle:
So Tyler, another proposition I want to put to you then is that: the probability of a recession rises as an expansion gets older. So at some point it becomes reasonable to say that an economy is simply due a recession. True or false?

Tyler Goodspeed:
False again. This is one that often comes up. You hear it from very informed investors saying, typically we have a recession every six or seven years, so we're due a recession. Again, this is an area where we have a falsifiable, testable hypothesis, namely, do economic expansions die of old age? Does the probability of recession increase with the age of an expansion as measured in months or quarters or years? And the answer to that is no. I mean, statistically, a 10-year-old expansion is no more likely to die in the next year than a one-year-old expansion. That is true on both sides of the Atlantic, and it's also true post-1945 and pre-1945. So some earlier research seemed to suggest that earlier economic expansions did die of old age and therefore maybe there were some important institutional changes since the 1930s and 1940s that limited that. But the reality is that when you use an improved and enhanced recession chronology for the United States, economic expansions have never died of old age.

Luke Bartholomew:
So I think the data you mobilise to answer that claim will probably answer this one as well, but maybe there's a slightly subtler version of the claim that recessions die of old age, which is something like, even if it is shocks that cause recessions, could it not still be the case that the economy becomes more vulnerable to shocks over time, perhaps because of leverage, poor matches or other vulnerabilities that just build up endogenously over time. So a shock that if it hit early wouldn't have killed the cycle, quote unquote, but if it comes a little bit later as time has passed, whatever processes have had a chance to develop, then it would kill the cycle. And so in some sense it's the combination of time and shocks that's doing the work.

Tyler Goodspeed:
So it's an interesting and nuanced hypothesis and some of the testable sub-hypotheses that it generates are, for example, that the longer an economic expansion has been going on and therefore the poorer the quality of matches, the more fragilities or vulnerabilities or overextensions, then we should expect deeper or longer recessions to ensue. But when you actually interrogate the data, it turns out that no, longer recessions do not follow longer expansions and deeper, faster contractions in bank lending or GDP or consumption or investment do not follow higher, faster expansions in bank lending or investment or consumption or GDP. So here again, we see that just the contours of recessions, consistent with the plucking model, the contours of recessions simply are unrelated to the contours of the preceding economic expansion.

Luke Bartholomew:
Okay, so what about this claim, which I think a lot of economic forecasters rely on being true, there is quite a cottage industry around this. Recessions can be predicted reliably by some small set of indicators, say it's the yield curve, the Sahm rule, credit spreads, whatever it is, but there is some reliable way of predicting recessions.

Tyler Goodspeed:
This one is also false. And there are some of these indicators that on a relatively small sample have a decent hit rate. So for example, for the United States, the yield curve, or in particular, inversions of the yield curve, had a respectable hit rate since the 1950s in terms of predicting recessions. Some of those were sort of lucky. I mean, in terms of prediction, lucky hits, because I don't think that bond market investors in August 2019 were correctly anticipating a novel coronavirus plunging the world economy into recession in early 2020. I also don't think that bond investors in 2000 were correctly anticipating the terrorist attacks of 9/11, without which there wouldn't have been the 2001 US recession. But when you go back farther in time, I mean, not only have there been a few false positives and false negatives in the United States with the yield curve, but then when you go farther back in time, yield curve inversions in the US were something of a banality. And similarly in the United Kingdom, even in more recent decades, there have been many false positives and false negatives from yield curve inversions. And other metrics, the Sahm indicator, leading economic indicators, these too abound in false positives and false negatives over the past few centuries.

Luke Bartholomew:
So the fact that we're finding so many of these statements are false might it seem somewhat embarrassing to economists, forecasters, policymakers. So what about this statement that sort of turns that logic on its head a little bit, which is that: the fact that recessions are so hard to predict is actually a sign of successful stabilisation policy. Because whenever downturns become sufficiently predictable, policymakers step in to offset them. So all that leaves is the truly unpredictable things in the data. So the very unpredictability of recessions that we find in the history is in fact a vindication of macroeconomic forecasting techniques and policymaking.

Tyler Goodspeed:
It's another really interesting one and an important nuanced question. This question, I think, also generates a testable hypothesis, which is that we would expect to observe the frequency of recession, the depth of recession, and the duration of recession to have changed over time systematically with the rise of a more interventionist countercyclical state. It is true that recessions have become less frequent over time. However, that is a long-run structural trend dating all the way back to 1700 and for which there are no, statistically, there are no structural breaks. So there's no break in 1913 in the United States with the establishment of the Federal Reserve. There's no break in the 1930s with the New Deal or in the 1960s with the rise of the Johnson administration's new social welfare changes. In the United Kingdom, there's no break in 1946 with the Beveridge reforms. So this is a long-run structural trend. And in terms of recessions themselves, recession depth and duration has been remarkably constant across time. So recession duration, recession depth has not gotten shorter or shallower over time. If anything, UK recessions since 1945 have actually lasted a little bit longer than before 1945. And then the other hypothesis would be that we would expect to observe some decline in, within cycle macroeconomic volatility. And while that is true, within each succession of expansion and contraction, we have observed a decline in the variance of growth since 1945. What's interesting is that it's only declined to levels observed before 1914. So the real exception is this incredibly martial period from the start of World War I in 1914 to the end of World War II in 1945.

Paul Diggle:
I wonder if their finding would be different if instead of being primarily interested in the activity data and growth in GDP, we looked at the price data instead and found that policy had done something to the inflation data and had perhaps, inflation targeting had anchored the price level and inflation rates in a way that hasn't occurred with the activity data and recessions because, for most economies, the price level is the primary target. But we don't have, we have macroeconomic stabilisation in a sense, but they're not sort of targeting a level of GDP growth. But maybe last for this round, Tyler, our last sort of true or false statement is that: recessions perform a cleansing function. So they liquidate bad investments, they eliminate zombie firms, they reverse excesses built up during expansion. And to use this famous Schumpterian phrase, they represent a process of creative destruction.

Tyler Goodspeed:
So this is one that I wanted to believe and I wanted to be true because as I said, recessions can be traumatic experiences. And so we want to believe that the pain is worthwhile, that it's performing some good. But the problem is that recessions, first of all, are rampant age discriminators. They discriminate against younger workers. They discriminate against younger, often more dynamic firms that maybe don't have much physical capital that they can pledge as collateral. Also, they discriminate against research and development. Research and development generally increases over the course of economic expansions and then collapses during economic recessions. And then also one of the primary mechanisms by which you get better quality matches and allocations is that during economic expansions, people quit one job and are hired by another. And that is a productivity ladder by which people move, people and capital move from less efficient, less productive enterprises to more efficient, more productive enterprises. And that ladder collapses during economic recessions because quit rates collapse, because no one dares to leave their job, and hiring collapses because a lot of firms just don't dare to take on new workers. More fundamentally, if there is some cleansing or reallocated function that recessions are performing, then we would expect to observe economies to look fundamentally different at the end of a recession or at the end of a subsequent recovery relative to how they would have looked had they continued uninterrupted a long-run trend. The reality is that typically, a few years on from a recession, the allocation of people and capital and output looks pretty similar to how it would have looked had it continued a long-run trend.

Paul Diggle:
Is that true, for example, after the financial crisis, Tyler? So particularly in the UK data, there is a, sort of, are noticeable – and tell us if you think this is really evident in the data – but a step down in the trend growth rate. So it doesn't look like a plucking model. It looks like a, or perhaps it is still, you can call it a plucking model, but the, sort of, the level of the previous trend just gets changed afterwards. So if anything, it's not sort of the creative destruction, clearing out the dead wood of a recession. It's a long-term hysteresis or labour-market scarring effect. How does that fit into your framework?

Tyler Goodspeed:
Yeah, so I discussed this one in the book because I think you're absolutely right. This is why I use the word typically, because as I also note in the book, whereas economic expansions tend to be broadly similar, each recession constitutes an expansion that failed in its own way or was terminated in its own way. One of the glaring exceptions to the plucking model was the recovery from the 2008-2009 recession, particularly, as you know, in the United Kingdom. And what's a defining feature of that recession and subsequent recovery is that there was a major regime change after 08/09 on both sides of the Atlantic in that policymakers mandated that their economies produce with less of a critical input for which over any economically meaningful time horizon, there's limited ability for businesses and households to find substitutes, namely bank credit. So with the implementation of successive rounds of Basel agreements, policymakers mandated that financial institutions substitute lending to the public sector, effectively substitute lending to the public sector for lending to the private sector. Now that had a much bigger impact in the United Kingdom than in the United States because the United States was traditionally much less reliant on banks for business external financing. We have a very diverse ecosystem of non-bank providers of credit to business – venture capital, private equity, thousands of regional banks that engage in relationship lending. In contrast, in the United Kingdom, businesses [have] historically – and this goes back decades – historically been much more reliant on banks for external finance and in the United Kingdom, there are fewer banks and they're on average bigger. So they were all more likely to be treated by the post-2009 regulatory change. And as I said, it's difficult to find substitutes for commercial and industrial lending by banks.

Luke Bartholomew:
So having done that myth busting there, Tyler, I want to ask you a slightly more conceptual question, actually to pick up a little bit on that Anna Karenina principle that you just referenced in your previous answer, and which you start the book with. And of course, that's the famous line from Tolstoy, all happy families are happy alike, all unhappy families are unhappy in their own way, and expansions are your happy families, recessions, your unhappy families. But I guess that got me wondering, I mean, if recessions are also distinctly unhappy in their own way, what is it about these phenomena we call recession such that they have enough in common to think that they do represent the same class of economic outcome, which is perhaps just a long way of asking about the definition of recessions and whether we should think of these as just statistical constructs or do they represent something like a natural kind. And the reason I ask you this is in part, and again, you sort of alluded to in a previous answer, you've done some empirical work around this book to try and use a new methodology to identify when the US was in recession in the more distant past. So can you talk a little bit about that question of recession definition and identification?

Tyler Goodspeed:
So first of all, I would note that the single most illustrative demonstration of a recession is the substitution of a sudden sharp upward movement in the unemployment rate for a more gradual sideways or downward movement in the unemployment rate. And it often occurs with deliberate violence. And that is driven typically in the first instance, not by a sudden increase in the rate at which firms fire workers, but rather a sudden collapse in the rate at which they hire workers. And this reminds me, this observation reminds me of a comment by the late US Supreme Court Justice Potter Stewart, who when asked to define pornography said, well, I may not be able to define it satisfactorily, but I know it when I see it. And I think with recessions, you know it when you see it. That said, in the book, I use the National Bureau of Economic Research's definition of a recession, which is a significant decline in economic activity that is spread across multiple sectors of the economy and that lasts for more than a few months. And so that combination of depth, duration and diffusion allows some flexibility to account for recessions like the 2020 pandemic recession, which in the United States was only two months. Those two months happened to straddle two quarters, but had they both fallen in the same quarter, then by the conventional two-quarter rule of thumb for recessions, that wouldn't have been a recession. But clearly, we know that was a recession because it was spread across multiple sectors. It involved large employment losses. And it lasted more than a month. So I think that that's the definition to which I would point folks is the official US National Bureau of Economic Research's definition.

Paul Diggle:
Tyler, how robust do you think your findings in the book, your conclusions in the books would be to other economies other than the US and the UK? Because, you know, the US and the UK are, they have plenty in common as economies, and perhaps most importantly for this sort of statistical look back at the GDP data and recessions in their trend growth rate, perhaps less so post the financial crisis. But if we were to consider, say China, much higher trend growth rate, recessions as the most simplistic definition of recession, you know, consecutive sorts of negative GDP growth, rarely occur outside of COVID. Japan, where the trend growth rate is so low that recessions are very, very frequent feature of the economic data, of the data-generating process. So and maybe there's different dynamics again in emerging economies much further back from the technological frontier. So have you thought about, have you started to dig into that data of how the occurrence of recessions, the predictability or not of recessions looks elsewhere?

Tyler Goodspeed:
It's a great question. And I should preface by saying that the reason I focused, the reasons I focused on the US and the UK were one, it's where I happen to have academic expertise. Two, it's where there's very good quality data going all the way back to the 18th century or could be extended back to the 18th century. So you have this robust long sample. And to a certain extent, 18th and 19th century US and UK had some parallels to emerging markets today. And then also one interesting finding of that contrast was that despite being very economically and financially integrated over the past few centuries, despite having broadly similar economic contours, the US and UK recessionary experiences were very, very different in the sense that the US historically was much more recession prone than the United Kingdom. So those are the reasons why I focus on those two. But I do talk about China briefly in the book because folks often say, oh, well, China doesn't seem to have recessions, despite, as you just pointed out, having at least one recession in the past decade, probably two, if you want to count distinct pandemic recessions in 2020 through 2022 as multiple recessions, or you could count them as a single one. But there was that Chinese recession, Chinese real GDP per capita actually declined in 1989. It's unclear if that was a recession, but it's perhaps not coincidental that that year coincided with considerable social unrest that culminated in the Tiananmen Square protests. Also, China suffered a devastating, even catastrophic recession in 1958 to 1962 during the Great Leap Forward. They suffered another devastating recession at the tail end of the Cultural Revolution in 1976. And so I think this points again to the exogenous nature of recessionary shocks. The interesting one as you as you highlight is Japan, because if you look at Japanese equity valuations, if you look at Japanese real estate valuations in 1989, and if you adhere to the sort of manias, panics and crashes or boom-bust view of economic fluctuations, then you would expect that the Japanese economy would have experienced a massive decline in economic activity following the decline in those valuations. But what's interesting is that those valuations peaked in 1989, but did the Japanese economy enter recession in 1989? No. In 1990? No. In 91? No. In 92? No. Only in 1993 did the Japanese economy enter a relatively mild recession, again in 1998 during the Asian financial crisis. So I think, and if you look in per capita terms, real GDP growth in Japan in the 1990s and the 2000s wasn't great by historical Japanese standards or by US standards. But not entirely inconsistent with what you would expect from a mature economy that had experienced rapid growth as it reached the production possibilities frontier and then grew in line with its potential. And that potential is driven primarily by very slow and then ultimately declining, very slowly growing and then ultimately declining working age population. So even the Japanese case, I don't think is consistent with a boom-bust view of economic fluctuations.

Luke Bartholomew:
So as you say there, Tyler, the US economy seems to have been a bit more recession prone than the UK economy, at least in the more distant past. Yet the US economy has higher productivity, higher GDP per capita, and on most measures perform more successfully over the long run. So, two questions related to that. One, I mean, what does that tell us about the relative importance of recession prevention versus long-run growth? Is it a vindication of the old Bob Lucas line about long-run growth being the thing it's hard to stop thinking about once you start? And second, I think I know what your answer is going to be to this given what you were saying earlier, but do you think there's potentially any causal connection between those two things, perhaps a certain kind of model of capitalism both increases potential growth and also recession prevalence that you kind of have to have both? Or do you think it's just random chance and it still just remains shocks?

Tyler Goodspeed:
Great, great question. So yeah, over the past 3 1/2 centuries, but particularly just over the past two centuries, the United States was much more recession prone than the United Kingdom. And in the past century alone, the United States experienced recession in 1937, 1948, 53, 57, 60, 70, 81, 2001. The United Kingdom did not experience recession in those years. And yet, the United Kingdom is and has for most of the past century been about 30% poorer per person than the United States. And so what that says to me is that as much as we worry about recessions, and rightly so because recessions hurt a lot of people, we probably ought to be at least as concerned about economic expansions because at the end of the day, it's the majority of years in which economies expand that matter much more for long-run prosperity and human flourishing than the minority of years in which they contract. And in terms of whether this differential recessionary experience is driven by Americans being more prone to entrepreneurialism or mania, panic and crash, versus their more staid British counterparts, what I find in the book is that differential recessionary experience is primarily driven by much more banal prosaic factors. So first and foremost, since 1826, the United Kingdom had a system of nationwide branch banking. And if you think about a national economy as being analogous to a broadly diversified portfolio, then weakness in one sector or one region can be offset by strength, resilience in other sectors and other regions. In contrast, for most of US history, right up until the 1970s and 80s, in most US states, not only could you not operate a bank across state lines, you couldn't even operate more than one bank branch within a state. And what that meant is that you had tens of thousands of tiny, undercapitalised, under diversified financial institutions that would tend to amplify and propagate adverse shocks when they would occur. The second reason that the United Kingdom has had fewer recessions over the past couple of centuries is that many of the US recessions from 1945 to right up until the 1970s were oil related. And during that period, the United Kingdom's economy was overwhelmingly reliant on coal. And the UK went from 1926 to 1972 without an official coal strike. So those 1948, 53, 57, 70 US recessions that were very oil related were simply, those shocks were simply much less impactful on the more coal-oriented UK economy.

Paul Diggle:
So Tyler, we're running out of time, but maybe let me ask you a final question, which is, we're of course experiencing an oil shock at the moment. I mean, as we record this on the 16th of June, actually oil prices have been coming down again for a little while. But you know, a shock is in the system, as it were. And as you said there, oil shocks, energy shocks more broadly, are one of the key shocks that generate these recessions. So perhaps I can slightly tongue-in-cheek tempt you to venture a recession prediction? Notwithstanding all we have said in the context of this energy shock, perhaps given the potential shocks that could lay down the tracks from stock market moves in the context of fairly full valuations, a labour market shock from AI, which many worry about. So yeah. Venture a recession prediction.

Tyler Goodspeed:
Well, as you anticipated, having written a book on recessions in which I conclude that recessions are fundamentally unforecastable, I should hesitate to get into that business now. What I can say is that the book doesn't conclude with this sort of hopeless, throw your hands in the air, these things are unpredictable, c'est la vie. Rather, it identifies some of the types of shocks that historically have murdered economic expansions. And you get a sense of the unconditional probabilities of those shocks occurring in any given year. So for example, over the past century, there's been about a one in 100 chance in any given year of a pandemic-related recession. There's been in the United States about a one in 10 chance of an energy-related recession. That has been declining over time but if you look over the past century, it's about a one in 10 chance. In the United States, again, in any given year, there's about a four in 100, so I guess a one in 25 chance of credit controls-related recession. And so you can sort of evaluate, okay, if those are the unconditional probabilities, then conditional on what I've already observed this year, would I subjectively revise up or down my recession probability for the next 12 months? When I'm looking at some of the energy disruptions of 2026, I look for historical analogues. So in some respects, the 1973 Arab oil embargo bears some resemblance because unlike with the energy shock of 2008, for example, or 2001, with 1973, we were talking about the scarcity of physical barrels and physical cubic feet. But there are differences between the 2020s and the 1970s. So the economy is much less, a dollar of output is much less energy intensive generally and oil intensive specifically. Supply is much more diversified both geographically. There's a lot more non-OPEC production. OPEC’s share the market is lower than it was in 1973 and non-OPEC supply is more responsive. And then also just the energy mix has changed since 1973. And furthermore, we learned lessons during the 1970s. And that's why we now have strategic petroleum reserves that have been releasing reserves throughout the past couple of months. So there are some historical analogues, but they're always going to be similarities and differences to those analogues.

Paul Diggle:
Brilliant. Well, that's about all we have time for today. Thank you, Tyler Goodspeed for joining us. Once again, Tyler's book is Recession: The Real Reasons Economies Shrink and What to Do About It. We thoroughly recommend it to listeners of the podcast. And thank you to you for listening to Macro Bytes from Aberdeen Investments, as ever please like and subscribe to the podcast on your platform of choice. But until next time, goodbye and good luck out there.

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