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By New_Deal_democrat March 6, 2018 9:54 am
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A case study of recession in the absence of a yield curve inversion: 1948
 
 - by New Deal democrat
 
As readers know well by now, I am looking for metrics that can explain the onset of recessions in situations where the yield curve never inverts.
 
To recap, between the early 1930s and the mid 1950s, the yield curve never inverted and yet there were four recessions:
 
 
[Note that beginning in 1935, all Fed district banks were required to have the same discount rate, so the NY Fed rate was also the national rate.]
 
The recession that intrigues me the most is the recession of 1948.  Unlike the recession of 1938, it does not appear to have anything to do with the sudden introduction of contractionary fiscal policy. Further, it is a situation where the Fed did little or nothing to chase inflation -- in fact, the biggest inflation of all including the 1970s since World War 1:
 
 
In 1947, consumer inflation reached 20% YoY, and commodity inflation 35% YoY! The Fed did nothing until. late in 1948, it raised rates from 1% to `1.5%.
 
In other words, it's hard to blame the 1948 recession on the Fed!
 
I have found a Fed study from 1954 discussing the 1948 recession in detail (warning: pdf)
 
The paper describes the recession as having mainly been an "inventory correction." Basically, at the end of World War 2, there was a huge (perhaps 15 year!) backlog in consumer demand. Production and consumption took off like rockets, but once the initial backlog was fulfilled, the pace of each declined. Because producers hadn't adjusted their production in advance, inventories built up, and in reaction producers cut back production. [Note: this sequence still seems to be the same: sales lead inventories. It is the increase in inventories that gives producers the signal to cut back production.]  The paper's line of argument is set forth below:
 
 
And here's the summary graph of data from the recession:
 
 
I have read elsewhere that corporate profits declined in advance of this recession, but I haven't found any data describing that decline.  Additionally, although I haven't reproduced the text, the Fed paper also indicates that by 1948, as their immediate needs were satisfied, consumers put more of their earnings towards savings, i.e., the savings rate increased. 
 
We do have good archival information on producer commodity prices (red in the graphs below), consumer prices (green), and average wages in manufacturing (blue).  Let's take a look at them YoY:
 
 
and now, normed to 100 as of the end of World War 2:
 
 
In accord with the Fed's study, the data shows that wages and consumer inflation increased at nearly identical rates. So it does not appear that consumers were under any particular pressure.
 
Rather, especially as shown on the second graph, it does appear that producers were unable to pass on all of the commodity price increases to consumers, and so had to absorb a hit to their profit margins. This led to a cutback in production, and to layoffs. Once commodity prices abated, and inventories were absorbed, the postwar expansion continued.
 
Now let's update the last two graphs to the new Millennium:
 
 
The ongoing surge in producer prices in excess of consumer inflation during the 00s is evident. The abatement of these pressures was one reason that the present expansion began in mid 2009. We also have some slight commodity price pressure that has begun in 2017.
 
So why didn't we fall back into recession in 2011 as commodity price increases, especially gas prices, reasserted themselves?
 
The answer is, there was a marked slowdown, even one quarter of contraction, of real GDP in 2011:
 
 
This has been only a preliminary look. But this case study of 1948 suggests that, even in the absence of a yield curve inversion, or significant Fed tightening, a recession can occur due to a mismatch between inflationary forces and consumer demand, that is reflected in substantial increases in commodity inflation in excess of consumer inflation over a significant time period.
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