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Tyler Goodspeed: What We Get Wrong About Recessions
Dr. Tyler Goodspeed shares his thoughts on what a recession is, what it isn’t — and how you can smartly prepare
Defining a recession can often differ by person, household or status. What causes it? Will one happen soon? Is one happening right now?
Dr. Tyler Goodspeed, the chief economist of ExxonMobil and former chair of the Council of Economic Advisers in the first Trump administration, has some thoughts. In that role, he worked on strategies to cultivate the government’s economic response to the pandemic — some of which likely informed his newest book, “Recession: The Real Reasons Economies Shrink and What to Do About It,” which came out March 31.
With plenty of uncertainty around the economy right now, we asked Goodspeed how to define a recession and what consumers should be doing if they’re worried about one.
Q: What is your definition of a recession?
A: A lot of readers probably are familiar with the “two-quarter recession rule” — that if the economy (as measured by gross domestic product) contracts two quarters in a row, then that means there’s a recession. Sometimes that’s called a technical recession.
I don’t use that definition, in part because if you go back 200 years, there’s no quarterly measure of gross domestic product. I also think it can be limiting, especially considering some of the measurement issues, because GDP is constantly being revised.
So in the book, I rely on the definition used by the National Bureau of Economic Research, which is actually the official recession arbiter for the United States. Basically, it’s a broad-based economic contraction that spreads across sectors, lasts more than a few months and involves outright employment losses.
That is a somewhat flexible definition, but it allows for contractions like we saw in 2020. It was only two months long, technically. Those two months had been concentrated in the same quarter; by the technical two-quarter rule, it wouldn’t constitute a recession. But that was such a deep recession that even if it had been a month, I think we all would have said, “hey, that was an economic recession.”
Q: What do you think that people get wrong about what a recession is — and what it isn’t?
A: When you listen to financial commentators talk about recession risk, they’ll often say the economy is at risk of tipping or slipping or dipping into recession. But that’s not really how recessions commence. John Maynard Keynes, the great British economist, noted the deliberate violence with which periods of economic contraction interrupt periods of positive economic growth. And really, recessions are characterized in the first instance by sharp sudden upward movement and the unemployment rate.
So [in a recession], there are lots of people without work. [People are] trying to find work but can’t find it. I think that’s something that a lot of people miss — they think that recessions are about sort of undulations or oscillations around a rising trend, but really recessions are about sudden sharp downward movements and negative deviations from trends, rather than [going] a little bit above trend or a little bit below trend.
Q: What are the most likely contributing factors to a recession, in terms of how it happens today?
A: One of the points I make in the book is that recessions are rather like unhappy families. In the opening lines of Leo Tolstoy’s “Anna Karenina,” he notes that happy families are all alike but every unhappy family is unhappy in its own way. And similarly, each recession constitutes an economic expansion that failed in its own way. There are, however, some perennial killers of economic expansion over time.
One of the most prolific killers of economic expansions, not just over the past 80 years, but really over the past four centuries, are energy supply shocks. Just looking since 1945, there have been 12 U.S. recessions — all but two of which had energy supply shocks as major contributing factors. (Those two outliers were the 2020 economic recession and the relatively mild recession in 1960.) Similarly, in the United Kingdom, they’ve had fewer recessions since 1945 and all but one of those involved an energy supply shock.
If you go back farther in time, actually, adverse winter weather was a frequent contributor to recessions on both sides of the Atlantic. In the 18th century into the 19th century and even as recently as 1946-47 in the United Kingdom, they had a very severe protracted recession that was probably extended by almost a year because of a very bad winter.
Another force that has historically not only generated recessions, but has generated some of the worst, most protracted recessions that we’ve observed is war. War is the single most destructive force that can be inflicted on an economy.
Q: With the war in Iran happening now, do you foresee an economic impact happening here that could lead to a recession?
A: One of the conclusions of the book is that recessions are fundamentally un-forecastable. They are generated by random and unpredictable shocks. One thing I have been telling people, having done the research on the book, is that I think a lot of folks are looking for recession risk in the wrong place.
We’ve heard a lot of concerns about an AI bubble, and that perhaps an AI bubble bursting could cause the next recession. A lot of folks are likening the investments in AI to the dot-com investments of the late 90s-early 2000s.
The point I make is that actually, the triggers for recession tend to be much more prosaic. If indeed traffic through the Strait of Hormuz were to come to a halt for a protracted period of time, you are talking about 20% of the world’s petroleum that passes through that Strait. If that Strait were to remain closed to traffic for several weeks or longer, historically, that would have been a recession trigger.
There are some other things that we can see looking around the world today that remind us of past recessions. There’s a bill making its way through Congress — I don’t think it will pass — but it would impose a 10% cap on credit card interest rates. What credit card providers would tell you is that if that were the case, then there are a lot of accounts that would be closed, and a lot of credit that would not be extended. If you look back over the past 80 years, the imposition of credit controls was an accomplice to the murder of economic expansions in 1948, 1970 and 1980. So those are some of the culprits that I think history suggests we should be looking out for, rather than the more conventional narrative of boom-bust cycles.
Q: What can the everyday consumer do now to prepare for a recession?
A: If you’re investing in financial assets, you want to make sure that you’re broadly diversified, (particularly as you get closer to retirement age), that you have an appropriate mix of higher risk stocks and lower risk bonds. Also, and this is going to vary depending on the household, [make sure] that you do have six to 12 months of liquid cash available to cover essential expenses in the event of employment loss.
Even if you’re not worried about employment loss, there’s a chance that if a recession were ahead and there were a hiring slowdown, that you wouldn’t be able to transition jobs as easily. So I think a broadly diversified portfolio with age-appropriate risk and trying to maintain cash. Liquid cash savings to cover outlays in the events of adverse employment event are generally sound principles.
Event planners seeking a speaker who can connect global economic forces to real-world business and policy decisions will find exceptional value in hosting Dr. Tyler Goodspeed. Drawing on his experience as former Chairman of the White House Council of Economic Advisers and now Chief Economist at ExxonMobil, Dr. Goodspeed delivers sharp, data-driven insights on how fiscal policy, geopolitics, and markets intersect to shape opportunity and risk. His presentations equip audiences with the clarity and context needed to navigate uncertainty and make smarter strategic decisions in a volatile global economy. Contact us for Dr. Goodspeed’s availability.
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