With each passing month, the current US economic expansion sets a new record for duration (125 months and counting through November). That’s a good thing, of course, but for some analysts it’s a warning sign. Expansions, like milk and airline tickets, have a limited shelf life, or so this line of thinking goes. But the hard evidence to support this view is thin, particularly for the post-World War Two era. That doesn’t mean that recession risk is zero these days, or that storm clouds aren’t gathering. But expecting a downturn to start because the expansion’s clock has been ticking longer than before is mostly myth rather than fact.
It’s tempting to argue otherwise, particularly if you’re looking for compelling headlines to attract eyeballs. But econometric analysis suggests another narrative, as several studies over the years have found. For example, a paper published in 2001 by the San Francisco Fed found that “the evidence indicates that expansions show no effects of aging or duration dependence, whereas contractions are increasingly likely to end with age. Thus, while prewar business cycle analysts were perhaps accurate in their assessment of expansion duration dependence, postwar commentators are not justified in suggesting that a business cycle peak is more likely to occur as an expansion ages.”
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More recently, Anatole Kaletsky, chief economist of Gavekal Dragonomics, reminds that “history shows that US expansions since the end of World War II have varied in length from 12 months to 120 months, with no sign of mean reversion.”
Visual inspection of GDP’s rolling one-year history confirms the point. As the chart below shows, the lack of a clear pattern in the length of the expansions is conspicuous.
If expansions aren’t destined to die at some pre-determined point – like the androids in “Blade Runner” – the question comes up: Is there a limit to how long a country’s GDP can rise without a recessionary interruption? Unclear, although Australia’s current run – in its 28th year, by some estimates – suggests that the ceiling may be higher than generally assumed.
Economist Robert Dieli, who analyzes the US business cycle at NoSpinForecast.com, is skeptical that expansions must end merely because they passed a certain time marker. “There are no cases of an economy growing itself into recession,” he quips.
If recessions aren’t related to the clock, what are the triggers? Dieli tells The Capital Spectator that the catalysts fall into three main categories: instability, sustainability, and the Fed. “Every recession has been preceded by two or three of these factors,” he observes.
Instability can be introduced by a shock of one type or another – the spike in oil prices in 1973-1974, for instance, was a key factor in the 1973-1975 recession.
Running low on a critical input for the economy – the sustainability variable – is another factor and the early 1970s oil crisis happens to be the poster child on this front as well as an historical example.
As for the current climate, Dieli says that the slow-but-persistent squeeze on supply chains, triggered by the ongoing US-China trade war, is on the short list of possible sources of trouble for the months ahead. “If supply chains lock up, the sustainabilty factor may kick in.”
There’s also the Fed factor to consider. Or as former Fed Chairman Ben Bernanke said, “Expansions don’t die of old age. They get murdered.”
Squeezing monetary policy too tightly at the wrong time has been a recurring feature of recession triggers in the past. The question is whether the central bank is wiser these days? The recent cuts in interest rates, despite relatively upbeat economic news, suggests that the Fed may take a more proactive approach in keeping the expansion alive for longer, although the jury’s still out.
Meantime, the US economy is still growing, although the expansion has slowed, raising questions about whether a downturn may be lurking. The Altanta Fed’s current nowcast for the fourth quarter estimates that output will increase 1.5%. If correct, the economy will decelerate in the final three months of this year to its slowest pace in 2019 – a substantially softer rise compared with the strong 3.1% increase in this year’s Q1. Nonetheless, a 1.5% gain is still moderately above a recession signal.
What might cause GDP to deteriorate further in 2020 and pull the economy over to the dark side? There are several possibilities lurking, but at least we can take one catalyst off the table: the clock.
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