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Vol. 3, 2026
Rethinking Recessions:
Is Most Of What You Know About The Business Cycle Wrong?
Despite a near-constant drumbeat of recession forecasts, the U.S. economy has once again avoided a recession in 2026. Is a recession just around the corner? Are we overdue? Most of what you think you know about economic cycles and recessions is probably wrong.
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If you set aside the brief, dramatic contraction in the global economy in the spring of 2020 due to Covid shutdowns, the U.S. economy has expanded without interruption for nearly 17 years.
Yet despite that incredible run, we frequently hear from clients and colleagues about an imminent recession, often accompanied by a forecast of a double-digit stock market decline.
The reality, however, is that investors base their thinking about economic cycles more on folklore than on facts.
Taylor Goodspeed’s new book, Recession: The Real Reason Economies Shrink and What To Do About It, examines the empirical evidence about downturns.
Inspired by his work, we identify a few popular misconceptions about business cycles and recessions among investors that are worth debunking.1
The 7-Year Itch?
The main fear investors have is that economic cycles have a natural expiration date, ending in a recession.2 But do cycles have a shelf life? Economists have been chasing this idea and fostering the misconception for at least four centuries.
In 1662, Sir William Petty wrote of "seven-year cycles of dearth and plenty." Around 200 years later, Clément Juglar, another physician-turned-economist, identified an "8.7-year cycle" and compared economic crises to predictable illnesses. Economists disagreed on the length of the cycle, but all agreed that it had a clock ticking down.
There was just one problem: there is no statistical evidence showing that business cycles occur with predictable regularity. Of the 35 expansions of the U.S. economy since 1854, only four ever reached the mythical 7-year "itch" mark, and all four of those started after 1960.3 If anything, economic cycles have become longer (see Figure 1).
There is no statistical evidence showing that business cycles occur with predictable regularity.
Fig. 1
Seven Year Itch?
Duration Of U.S. Expansions Since 1854*
Sources: NBER, Payden Calculations
*NBER recession dating begins as early as 1854 **Ongoing
More to the point, the probability that an expansion will die barely rises with its age; for instance, a decade-old modern expansion is about as likely to end as a pre-World War II expansion was in its second year (see Figure 2).
Fig. 2
Not Much Change
Fitted Probability Of A Recession Occuring In The Next Quarter, Pre-WWII Versus Post WWII*
Sources: NBER, Payden Calculations
*Data since 1855
Indeed, the longest U.S. expansion on record, starting in 2009, did not die of old age. The Covid shutdowns murdered it, to borrow Rudi Dornbusch's phrase.4
Expansions have no expiration date, so treating the calendar as a forecasting tool is closer to astrology than to economics.
Crystal Ball Mythos
Some investors will concede the point about astrology but remain convinced there is a method for gauging "where we are in the cycle" and "when a cycle is about to end."
The dominant approach is to consult so-called "leading indicators." But even this is more myth than reality. Consider the most famous leading indicator of them all: the yield curve, which has historically been "inverted" (with short-term yields above longer-term yields) before downturns. From 2022 to 2024, though, the yield curve stayed inverted for 27 months without a recession following.
Making matters worse, the lead time is wildly inconsistent. Sometimes the yield curve inverts 40 months before the start of a recession, and sometimes only 5 months, increasing the difficulty of the timing and making it somewhat useless for investors. Other commonly cited indicators have failed to lead, signaled false alarms, produced a wide range of lead times, or all three (see Figure 3).
Fig. 3
Nobody’s Perfect
Most Cited Recession Indicators And Their Track Record
Source: Bloomberg, Bureau of Labor Statistics, Conference Board, Institute For Supply Management, Department of Labor, Payden Calculations
*ISM officially publishes a recession “threshold” that historically ranges between 42 to 49. Before January 2024, ISM’s recession threshold was 48.7, which suggested that the economy was in a recession in 2022-2023. Turns out, it was a false alarm.
The so-called professionals fare no better with their predictions. When Lyndon B. Johnson's Council of Economic Advisers (CEA) delivered the 1969 Economic Report of the President, they declared that recessions were no longer "an inevitable fact of life." Then, a recession arrived within 11 months.
Similarly, in January 2001, Bill Clinton's CEA saw "no sign of an end" to the record expansion; a recession began in two months.
And, in 2003, famed economist Robert Lucas told the American Economic Association that the "central problem of depression prevention has been solved, for all practical purposes." Five years later came the worst financial crisis in 75 years.
The search for the economic crystal ball continues, and the results are abysmal. If anything, an official declaration of victory over the cycle has been the most reliable leading indicator of all.
The Bigger They Are, The Harder They Fall?
If cycles cannot be timed and so-called leading indicators fail to provide warning with any reliable regularity, surely cycles at least follow patterns: the bigger the boom, the harder the fall...right?
Turns out, no. There is no relationship between the average growth during an expansion and the depth of the subsequent bust (see Figure 4).5 In fact, one of the more tepid expansions on record started in 2009 and was followed by the worst recession in modern history (see Figure 4 again)!
There is no relationship between the average growth during an expansion and the depth of the subsequent bust.
Fig. 4
Larger Dip, Greater Comeback
Comparing Expansions To Their Subsequent Recession And Recessions To Their Subsequent Recovery*
Sources: Jordà, Schularick, & Taylor (2017), Bureau of Economic Analysis, NBER, Payden Calculations
*Both panels exclude the WWII Recession
More interestingly, the asymmetry actually runs the other way! The magnitude of the recovery usually mirrors the depth of the recession it follows: that is, the deeper the dip in the downturn, the sharper the snap-back (see Figure 4 again).
Contrary to widespread belief, a recession is not a bill for the good times, and the length of the party tells you nothing about the size of the check.
Too Much Of A Good Thing?
But surely the party must end with a hangover, right? If booms don't cause busts by their pace, perhaps they cause them by their excess? Or so the story goes.
Skyscrapers provide the most tangible talismans for the tale. For instance, when construction of the Empire State Building ended, the Great Depression began. When the Sears Tower reached its peak in 1974, that happened alongside the recession of 1973 to 1975.6
But the actual data say otherwise. U.S. building activity peaked around 1926 and had started declining well before the crash in 1929. More interestingly, actual real private investment was growing close to its long-run trend in the 1920s (see Figure 5).7 So much for the “Roaring Twenties”?
Fig. 5
What Defines Excess?
U.S. Private Investment Versus Long-Run Trend*
Sources: Macrohistory, Bureau of Economic Analysis, Payden Calculations
*Arguably, U.S. investment growth trend accelerated materially since World War II and since 2008, so we re-estimated trend line from 1947 to 2008 and from 2009 to today.
There were also recessions preceded by genuine overexuberance, such as the dot-com bubble, when private investment ran above its long-run trend for years (see Figure 5 again). But even there, overbuilding was not the sole cause of the 2001 recession; market overvaluation and fraudulent balance sheets were catalysts as well.
And what about today's AI buildout? As a share of nominal gross domestic product (GDP), private investment in nonresidential equipment and intellectual property products has climbed back to dot-com-era highs of 11.5%, yet total investment growth remains near its long-term trend (see Figure 5 again).8
So why does the "overinvestment" story persist? The answer: it satisfies a moral need.9 Or someone must have sinned, and the recession must be the wages of that sin. Calling it "overinvestment" is moral storytelling, not economic analysis.10
Short and Sweet?
Even if recessions don't arrive like clockwork, another great fear haunts investors: whenever recessions do arrive, the downturns often mean years of stagnation.
True, layoffs during recessions can hurt individuals long after the official end date; lost jobs and income don't always come back quickly. But at the level of the whole economy, nothing in the historical record justifies this fear. Despite all the ink spilled on recessions, the average recession is much shorter than the average gym membership.11
The average recession is much shorter than the average gym membership.
Since 1850, 70% of U.S. recessions have lasted approximately one year or less, and 94% have lasted two years or fewer. The postwar record is even better: every U.S. recession since 1945, including the brutal 2008-2009 downturn, was over within 18 months (see Figure 6).
Fig. 6
Short And Sweet
Share Of Post-WWII Recessions Still Ongoing After X Months
Sources: NBER, Payden Calculations
What about the Great Depression? It is the exception that owes as much to policy as to the initial shock: cascading bank failures met with inaction, tariffs, tax hikes, and then a second, policy-induced recession in 1937. The great outlier in the downturn duration data is also the great outlier in policy error.
Recessions end. They often end quickly. The rare ones that don't were prolonged by bad fiscal and monetary policy, not by nature.
Recessions Must Be Avoided At All Costs?
Ok, you might say, recessions don't last long, but we should avoid them because more recessions mean less overall growth?
Not necessarily. Since the 1820s, the United Kingdom has experienced far fewer recessions on average than the United States (see Figure 7).12 Yet the United States still overtook the United Kingdom as the richest country per capita in 1900, and the average American today is roughly 60% better off than the average Briton in comparable dollars (see Figure 7 again).13 Productivity growth, which drives a higher trend growth rate in the U.S., can more than offset its greater susceptibility to recessions.14
Fig. 7
The Price Of Safety
U.S. Versus UK Real GDP Per Capita Compared To Their 50-Year Rolling Recession Frequency*
Sources: Jordà-Schularick-Taylor Macrohistory Database, Bank of England, NBER, Maddison Project (2023), World Bank, Payden Calculations
The country with more recessions got richer. It seems that avoiding the occasional downturn thwarts long-run healthy growth.
It seems that avoiding the occasional downturn thwarts long-run healthy growth.
Bad Luck?
And that leads us to one question we've dodged so far: if not the calendar, the boom, or the excess, what actually causes recessions?
In Goodspeed's view, recessions are exogenous rather than endogenous. Or, in plain language: shocks—from plagues of locusts to oil shortages and weather disasters—often tip economies into contraction.
Goodspeed cites the Great Depression as an example. Before 1930, banks were confined to small geographic footprints. Consequently, without a diversified base of borrowers or depositors, local banks failed when the droughts hit. A drought covering dozens of agricultural states caused record bank failures and, ultimately, a depression.
It sounds shockingly simple, but take a few hundred random digits and smooth them out with a simple moving sum, and the result looks uncannily like an economic cycle (see Figure 8).15 No economy produced that line; randomness plus persistence is indistinguishable from a cycle.
Fig. 8
Smoothed Bad Luck?
Ten-Term Moving Sum Of Random Numbers From 0 To 9
Sources: Payden Calculations, Slutsky (1927)
While this is an interesting perspective, it's also possible that shocks merely coincide with fragilities already present in the economy, with overlapping pressures precipitating a recession. Take the 2008 recession: an oil shock hit an economy already weakened by a subprime crisis and highly leveraged households.
Sometimes recessions are bad luck meeting brittle design. Other times, the bad luck merely exposes it. Either way, the shock comes first.
A History-Driven Portfolio
If history suggests that recessions are hard to predict and far less common and less durable than feared, the best strategy for long-term investors would have been to position for expansions rather than for the occasional, often brief recessions.16
Since 1871, every 20-year holding period in U.S. stocks has produced a positive real return except one, which ended in 1921. Even during the worst stretch of the modern era, the 20 years from 1962 to 1982, stocks stayed ahead of inflation (see Figure 9).17 And an investor who bought at the very peak of the dot-com froth in August 2000, the worst entry point in a generation, has still beaten inflation by more than 5% per year since, quadrupling real wealth (see Figure 9 again).
Even during the worst stretch of the modern era, the 20 years from 1962 to 1982, stocks stayed ahead of inflation.
Fig. 9
Never Disappoint
20-Year Average Annual Inflation-Adjusted U.S. Stock Versus Bond Index Total Returns*
Sources: Jordà-Schularick-Taylor Macrohistory Database, SBBI, Bloomberg, Bureau of Labor Statistics, Payden Calculations
*Pre-1926 data from Macrohistory Database, 1926 - 2023 data from SBBI (SBBI US Large-Cap Stocks & SBBI US Long-term (20-Year) Corporate Bonds), and 2024-2025 data from Bloomberg (S&P 500 Total Return Index & U.S. Aggregate Bond Index). Pre-1926 bond returns are government bonds, where as post 1926 bond returns are long run corporate bonds. Index performance is shown for historical illustrative purposes only. Indexes presented are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. Past performance is no guarantee of future results.
Furthermore, pick any year in the last 154 years and look back 20 years; you have a positive real return in stocks—except for nine years (see Figure 9 again).18 Maintaining an overweight to U.S. equities in a balanced strategy has paid off in the long run. Other factors may preclude investors from holding such a position, but the historical data are unequivocal.
It is also worth noting that the U.S. may be exceptional, not an iron law of stock returns: on an annual return basis, U.S. stocks have outperformed global stocks in 62% of the years since 1991. And, cumulatively since 1991, investors in the U.S. S&P 500 Price Index (excluding dividends) have seen more than six times as much wealth growth as a global investor in ex-U.S. stocks!19
So the next time the downturn drumbeat starts, remember what three centuries of data actually say: it is hard to see recessions coming; they will not last long when they arrive; and for long-term investors, the surest way to lose to them is to spend the expansion in hiding.
Endnotes
1. Goodspeed, T. B. (2026). Recession: The real reasons economies shrink and what to do about it. Basic Venture.
2. According to The National Bureau of Economic Research (NBER), in an economic cycle, a recession refers to “a significant decline in economic activity that is spread across the economy and lasts more than a few months." Meanwhile, an expansion is a “period when the economy is not in a recession. Expansion is the normal state of the economy.” In other words, expansion generally refers to periods in which aggregate economic activity is rising. NBER defines a U.S. recession using six separate indicators, while the “common rule of thumb” is two consecutive quarters of negative GDP growth.
7. Jordà, Ò., Schularick, M., & Taylor, A. M. (2017). Macrofinancial history and the new business cycle facts.https://www.macrohistory.net/database/. In M. Eichenbaum & J. A. Parker (Eds.), NBER macroeconomics annual 2016 (Vol. 31, pp. 213–263). University of Chicago Press. (Data updated 2023–2025 with the Bureau of Economic Analysis real GDP data). Goodspeed, T. B. (2026).
13. Bolt, J., & van Zanden, J. L. (2025). Maddison-style estimates of the evolution of the world economy: a new 2023 update. Journal of Economic Surveys, 39(2), 631–671. Data: Maddison Project Database 2023,https://www.rug.nl/ggdc/historicaldevelopment/maddison/. Real GDP per capita in 2011 US dollars, converted at purchasing power parity (multiple benchmarks). Data through 2022 from the Maddison Project Database, version 2023 (Bolt & van Zanden, 2024); underlying country estimates from Broadberry et al. (2015) for the United Kingdom and Sutch (2006) for the United States. Maddison estimates end in 2022; 2023–2025 extended by the author using World Bank real GDP per capita growth rates. 2025 provisional. Figures for 2025 are provisional and subject to revision.
14. Goodspeed, T. B. (2026).
15. Slutsky (1927) showed that summing random numbers produces series that look convincingly cyclical despite containing no cycle. He drew digits from Soviet lottery results; we use our own random draws. The point is that apparent periodicity is weak evidence of a genuine underlying rhythm.
16. The information presented is a general economic perspective, not individualized investment advice. Overweighting equities carries risk: markets can experience prolonged drawdowns, elevated valuations may limit future returns, and there is no guarantee that U.S. stocks will continue to outperform other asset classes or markets as they have historically. Any investment decisions should be made in consultation with a professional advisor based on specific objectives, risk tolerance, and time horizon.
17. Stock and bond returns were obtained from Schularick & Taylor (2017) from 1872–1925, deflated using the CPI index in the same dataset. From 1926 onward, real returns data were obtained from SBBI; CFA Institute. (2026). Stocks, Bonds, Bills, and Inflation® (SBBI®) data [Data set]. CFA Institute Research and Policy Center; Jordà, Ò., Knoll, K., Kuvshinov, D., Schularick, M., & Taylor, A. M. (2019). The rate of return on everything, 1870–2015. TheQuarterly Journal of Economics, 134(3), 1225–1298.https://doi.org/10.1093/qje/qjz012.
18. Ibid.
19. Here, we use the MSCI Ex. U.S. Stock Index for global stocks and the S&P 500 Price Index for U.S. stocks. Both are price indices rather than total return indices due to data availability. Data obtained from Bloomberg.
This material reflects the firm’s current opinion and is subject to change without notice. Sources for the material contained herein are deemed reliable but cannot be guaranteed. This material is for illustrative purposes only and does not constitute investment advice or an offer to sell or buy any security. Past performance is no guarantee of future results. Point of View articles may not be reprinted without permission. We welcome your comments and feedback at editor@payden.com.
This material has been approved by Payden & Rygel Global Limited which is authorised and regulated by the Financial Conduct Authority. This material has been approved by Payden Global SIM S.p.A.. which is authorised and regulated by CONSOB.
