Overdue for a Big Recession?

If you pay close attention to the financial news – not something we encourage — you’ve probably heard that the current U.S. economic expansion is due to end and a recession is sure to come along in the not too distant future.  Many stories go on to note the consensus opinion of economists that the next recession will probably not be as severe or as long as the last one in 2008-09.

But, why are most economists predicting a milder, shorter recession for the U.S. economy?   According to the National Bureau of Economic Research, the U.S. economy hit its last trough in June 2009 and has been in expansion mode ever since.  If that continues through June 2019, this period of growth will take its place as the longest economic expansion on record.  Wouldn’t that suggest we are in for a big recession when the next one does finally hit?  Do recessions really act like earthquakes — the longer you go without one, the bigger they are?

In short, no.  Recent academic research suggests that longer economic expansions do not tend to be followed by more severe recessions.  These authors argue that this long expansion period actually tells more about the severity of the recession preceding it than it does about what comes next.  The last recession was the longest since World War II, lasting 18 months (December 2007 – June 2009).  It was also severe, with the fourth quarter of 2008 registering an 8.4% drop in real GDP (most recently revised estimate).

Research also suggests that there may be differences in “normal” recessions and recessions precipitated by some external shock to the economy, with the latter associated with more pronounced, or longer, downturns.  The last two recessions, 2007-09 and 2001, were preceded by financial market bubbles.  In 2001, the dot-com stock bubble burst quite loudly, and we had a recession.  In 2007, the subprime mortgage and housing bubble blew up.  Mix that with large scale financial misdeeds and fraud, and we suffered through a major financial market meltdown and recession.  Is there an economic bubble now that is ready to burst and cause damage?  If so, it is not readily apparent.  There are other factors that can bring on recessions, but, the recession catalyst this time is not likely to be some giant shock. If that’s correct, then our next recession should be tame in comparison to the last.

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Any opinions are those of Dave Werle and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will provide to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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