Why Recessions Are Unpredictable Shocks Rather Than Economic Cycles

Tyler Goodspeed, the chief economist of ExxonMobil and a former acting chair of the Council of Economic Advisers, argues that economic recessions are random occurrences driven by unpredictable shocks rather than predictable cycles. In his book, Recession: The Real Reasons Economies Shrink and What to Do About It, Goodspeed concludes that the traditional pursuit of business-cycle patterns is fundamentally flawed and that recessions will continue to occur simply because history continues to happen.

Goodspeed reached this conclusion after analyzing four centuries of economic data, ranging from the financial crisis of 2008 to trade collapses in 17th-century colonies. He contends that the human tendency to seek patterns in economic downturns is a biological impulse rather than a scientific reality.

Goodspeed wrote the book in his private capacity and not as a representative of ExxonMobil.

According to Goodspeed, the belief that economies expand and contract in predictable waves is one of the most durable but incorrect frameworks in economics. He tested various theories, including three-year cycles, seven-year cycles, Kondratiev’s waves, and 60-year super cycles, but found that none survived statistical scrutiny.

His analysis indicated no relationship between the length or height of an economic expansion and the timing or depth of the following recession. He concluded that the data resembles a sequence of unpredictable shocks rather than a recurring rhythm, noting that a long boom does not predict a hard bust, nor does a short one predict a mild correction.

Goodspeed suggests that the habit of attributing recessions to specific causal patterns is a result of humans being storytellers who embed patterns into narratives featuring heroes, villains, and moral lessons to avoid perceived prior errors.

The Drivers of Economic Shock

Goodspeed identifies massive shocks—primarily those related to war and energy—as the actual causes of recessions. He argues that these two forces produce outputs that are nearly impossible to replace on short notice, making them devastating to economic stability.

Energy serves as the foundation for transportation, steel, fertilizer, and power generation. When supply is disrupted, economies cannot easily find alternatives. Goodspeed identifies war as the single worst shock that can be inflicted on an economy.

To illustrate the randomness of these shocks, Goodspeed points to an economic contraction in the American colonies during the early 18th century. While there was no war or financial panic, Atlantic piracy had peaked, with figures like Blackbeard blockading the port of Charleston and choking trade routes from Long Island to the Caribbean, leading to a collapse in trade and the money supply.

Goodspeed also challenges the conventional narratives surrounding more modern crises:

• The 2008 Recession: Goodspeed argues this was triggered by a record oil price spike in June 2008. He contends that this spike forced households to absorb more than $2,000 in additional energy costs, which, combined with adjustable-rate mortgage resets, broke the consumer.
• The 2001 Recession: He suggests the term dot-com recession is a misnomer, noting that the Nasdaq crash was the least consequential shock of that year. He argues the downturn should be known as the 9/11 recession because all output decline during that recession occurred in the quarter the attacks took place.
• The Great Depression: Goodspeed attributes this period to a proliferation of shocks, including locust plagues and contractionary monetary and fiscal policy, rather than a single cause.
• The 1873 U.S. Recession: He views this as the result of a providential locust plague rather than a railroad boom.

The Myth of Creative Destruction

The research also led Goodspeed to reject the theory of creative destruction, which posits that recessions benefit the economy by purging inefficient firms and reallocating resources to more productive uses.

Goodspeed found no evidence of a salutary, cleansing function to recessions. Instead, he describes recessions as rampant age discriminators that systematically protect entrenched incumbents while harming marginal workers and younger firms.

He notes that research and development typically contracts sharply during downturns, occurring precisely when firms should be investing in new approaches. According to Goodspeed, when a recession ends, the economy’s composition remains remarkably similar to how it would have looked had the downturn never occurred.

The idiosyncratic nature of recessions rebels against evolved human logic. We are pattern-seeking mammals; patterns are how we relate observed stimuli to subsequent negative experiences.

Tyler Goodspeed

Policy and Business Implications

Based on the premise that recessions are episodic and random, Goodspeed argues against the use of contractionary fiscal or monetary policy during a downturn. He cites the austerity attempted during Britain’s 1847 financial crisis and the policies of the Great Depression as examples of how such measures make economic situations worse.

He is similarly skeptical of the idea that governments can use stimulus to proof an economy against future random shocks.

For business owners and leaders, Goodspeed suggests that while shocks are unforecastable, companies can benefit by thinking in insurance-like terms to mitigate adverse impacts. He concludes that the primary obligation of policymakers when a recession hits is to do no harm.

Regarding the current conflict in the Middle East and its potential energy implications, Goodspeed declined to comment, focusing instead on the backward-looking analysis presented in his book.