When Will the Next Recession Hit?
NEW YORK -- When might the next U.S. recession be due? It's a an increasingly important question with a potentially faltering equity market, more investment banks finding that debt they have bought in new issues they can't easily be offloaded, a slowdown in China, modest U.S. GDP growth and the very fact that the Fed keeps delaying rate rises (which shows its own concerns about the stability of the economy).
The debate as to the length of booms and busts is as old the Bible. In the old testament story of Joseph, we have a clear indication of a seven-year boom, followed by a seven-year bust. That isn't a bad starting data point, although by today's standards those periods seem a bit long -- particularly busts rarely last that long.
The U.S. National Bureau of Economic Research provides monthly data on recessions going back as far as 1854. Per that data, from 1854 to 1919, there were 16 cycles. The average recession lasted 22 months, the average expansion 27. From 1919 to 1945, there were six cycles; recessions lasted an average 18 months, expansions for 35. From 1945 to 2001, it was slightly different -- 10 cycles, with recessions lasting an average 10 months and expansions an average of 57 months (per NBER Business Cycle Expansions and Contractions". NBER. Retrieved Oct. 1, 2008).
So recessions, thankfully, tend to be shorter than booms, and at least up to the 2001 Internet-driven recession, booms were just less than five yrs. The length of boom periods actually seems to have increased, at least between 1945 and 2001, showing perhaps a period of great economic stability. The chart below showing annualized GDP change from 1923 to 2009, demonstrates a broadly similar trend (data in the chart are annual from 1923 to 1946 and quarterly from 1947 to the second quarter of 2009.)
So, what's the situation since the last recession? While the financial markets started faltering in 2007, broadly U.S. GDP only went negative in the first quarter of 2008 and was back in positive territory by end of 2009. So, while it may not have felt like it, we've actually had nearly six years of positive GDP since then.
Part of the reason it has not felt like it was that the 2008-2009 recession created such an explosion in the U.S. financial system, that deep confidence in a recovery has never quite come back. The Great Recession seemed to signal the end of the whole period of financial capitalism, and no one in the U.S. has quite figured out what will replace it. The GDP growth rates since the great recession have been particularly low for a recessionary rebound. Usually U.S. recessions have been followed by 4 to 5 percent growth in recovery years, whereas we have not seen since 2009 any year that has even reached the 3 percent GDP growth level yet.
If the five-year cycle was right, we are certainly now due for a recession, but then perhaps this long post-recession period has been an anomaly precisely because the great recession was so debilitating that it has not been an ordinary, robust recovery period. In fact some economists effectively believe that, with the West so denuded of manufacturing, we are still in recessionary type angst. There's a "Great Malaise" certainly in places like continental Europe -- and even the U.K. suffered effectively a triple dip recession up to about 2013.
Having said that, six years of positive U.S. GDP growth is still a long time and there are increasing jitters in the market, compounded by the China crisis, so to assume that recession is on its way in the next year or two is not an entirely unreasonable assumption. Some have even argued for much of the U.S. middle classes a recession started already by end 2014. During the first quarter of 2014, earnings by major U.S. retailers missed estimates by the biggest margin in 13 years. This may have been something to do with the impact of internet retail revolution, but the biggest reason for this was probably that the middle class consumers in the U.S. are tapped out.
In any event, let's not try to predict whether there will be a recession or not any time soon in the U.S. (despite the doom and gloom above, various factors also argue against a recession: the cleaned-up and robust state of the U.S. banking system, the fracking revolution, controlled inflation, etc).
But here's one curious thought for the Federal Reserve. It keeps on putting off rate rises precisely because it doesn't want to take away the punch bowl and trigger an equity market or real underlying economic downturn. But if a recession is coming anyway, sooner or later, and rates are still low, the Fed will again find its key weapon for fighting recessions (cutting rates) isn't available to it. Hence, we would be back to quantitative easing and other measures.
Perhaps instead it would be better for the Fed to assume a recession is inevitable fairly soon and to raise rates now precisely so that it can then use rate reductions as a tool to fight the recession when it does come. Maybe you will say that said Fed rate rises will themselves trigger a recession, but if you think it's coming anyway, what matter is the exact cause or timing? A curious dilemma indeed. Still, if the Fed does not entertain this kind of alternative thinking, how do we ever get of the low rate addiction?
Jeremy Josse is the author of Dinosaur Derivatives and Other Trades, an alternative take on financial philosophy and theory (published by Wiley & Co.). He is also a Managing Director and Head of the
Financial Institutions Group at Stern Agee CRT in New York. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of CRT Capital Group LLC, its affiliates, or its employees. Josse has no position in the stocks mentioned in this article.