The long-held (and correct) view of this newsletter – right up until the market’s collapse from mid-September on – was that the credit crisis was essentially a financial event, and that the broad economy, housing excepted, had yet to hear of it. Strengthening real GDP growth from 4Q07 to 1Q08, and thence to 2Q08 – in which the positive effects of exports completely overwhelmed the drag of housing – plainly bore this out.

As late as September 11th, the broad equity market was still holding above its July lows around 1215. Then came the Lehman bankruptcy, the forced sale of Merrill Lynch, the government seizure of the zombie WaMu, the near-death experience of Wachovia, a major money market fund breaking a buck, and the completion of a total failure of the global credit function. These disasters, in turn, were followed by the grotesque rejection of the Paulson plan’s first congressional vote, and a complete shattering of confidence around the world. In less than a month, the S&P went to 899 on a closing basis, after a brief intraday stop around 840.

There was no way the economy was going to dodge that bullet. It is now reasonable to suppose (unless you are Nouriel Roubini, CNBC’s new favorite permabear) that the economy may have begun to contract in 3Q08, is almost certainly contracting in the current quarter, and may yet do so in 1Q09. (You’d have to be either much smarter or much braver than I to hazard a guess on 2Q09, but with the world awash in liquidity and real short-term interest rates meaningfully negative, declining GDP even then sure looks like a long shot at this writing.)

(Needless to say, the specter of recession has obviously been a great relief to catastrophist journalism, which by the third week in October was going to be forced to admit fairly soon that the credit crisis had passed its trough.)

So it doesn’t seem a moment too soon to trot out the NBER’s chart of previous postwar recessions, for some much-needed perspective. But first, the definition: NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

There have been, as you are about to see, ten such officially-sanctioned episodes since the end of World War II. (To be insufferably pedantic, another brief recession was still ongoing at war’s end, and is not counted here.) The average decline in real GDP from peak to trough was about 1.7% (for perspective, in the Great Depression, real GDP declined about a third between 1929 and 1932). Beyond that, let the numbers speak for themselves:

The average, as you see, has been about ten and a half months. The two longest recessions were that occasioned by the first profound oil shock in October 1973, and the one deliberately engineered by the great Paul Volcker in his successful effort finally to break the back of inflation.

Nor will it have escaped your notice that since the Volcker recession (blessings and peace be upon it and him), both the frequency and the length of recessions have declined meaningfully. Indeed, in the quarter century since Thanksgiving of 1982, the U.S. economy has been in recession for all of 16 months.

An average eleven-month, two percent decline in real GDP is no particular day at the beach, but it is hardly a reasonable observer’s definition of Armageddon, either. And said reasonable observer may also be permitted to wonder – at 900 on the S&P – how much a recession may have already been priced in.

Because the plain fact is that the stock market – discounting mechanism that it is – is usually already declining even before the onset of recession, and that it historically turns up again about halfway through one. (It did precisely that in the next-to-last recession, bottoming on October 11, 1990. It failed to do so in the last recession, as it continued to reel from the shocks of 9/11, Enron, and the accounting frauds and scandals which surfaced in early 2002.)

Journalism’s recession drumbeat is about to become constant and deafening, as it implies that today’s economic reports – which look backward at a month’s or even a quarter’s economic activity – are or ought to be an indicator of what the market (which at any moment will start looking across the valley ahead, as it always does) is going to do now. (“Unemployment continued to rise again last month, ergo the stock market must be going to continue declining this month” – that sort of solipsism.)
                                                  
This is what journalism always does. (Time still had the recession on its cover in January 1992, ten months after growth had resumed.) It is deeply invested in bad news, such that it will continue declinist reportage long past a trough. And it premises the malignant fiction that recession and stock prices are coincident, which guarantees that the investor will still be reacting to scare headlines when they are, financially speaking, yesterday’s news. You must not fall victim to this “thinking,” nor allow your clients to do so. The equity market is always about tomorrow, even as journalism is always about yesterday. Mind the gap.

Nothing in this essay should be taken as a prediction that the current recession – assuming always that we are having one – will be of average duration and/or depth. This exercise is merely intended to place a very scary concept in some objectively verifiable historical context. And to warn you that, if history is any guide, the market will probably not wait for CNBC to admit that the recession is over before taking off on the next leg of its permanent uptrend.