HH Are Recession Risks Increasing In The U.S.?

This is now the second-longest U.S. economic expansion ever.1 We always knew it was going to be a long road to recovery—the severity of the Great Financial Crisis and the mediocrity of the subsequent growth trajectory meant a long and winding road back to normal activity levels. But by most measures, the U.S. economy is now back to normal. And we are starting to see a few signs of late-cycle imbalances that show an economy on the cusp of overheating. In that regard, it’s logical for us to start asking about when the next recession might occur and the implications of that for multi-asset investment strategies.

Length of economic expansions in U.S., by total number of months

Source: Thomson Reuters Datastream, National Bureau of Economic Research

How economists look at recessions

Recession forecasting is hard—done correctly it is an exercise of evolving probabilities and risks, not bold proclamations of impending doom. In some ways, the science of recession forecasting is similar to how geologists model the threat of an earthquake.

Geologists look for areas of stress and imbalance in the Earth’s crust (i.e., fault lines). Economists look for evidence of macroeconomic imbalances. These imbalances come in a few different flavors— overinvestment (e.g. late 1990s), overborrowing (e.g. 2007), or an overheating labor market (e.g. late 1960s). We track imbalances as a medium-term risk indicator. They don’t tell us precisely when the next recession will hit—but they are very important in determining the danger zones to focus our attention on and when conditions are ripe for a downturn to occur.2

Geologists also use seismographs to measure shaking in the ground. Economists track the economy’s performance in real-time, looking for leading indicators that suggest a slowdown may be imminent or already underway. 

The intersection of macro and markets

Recessions are damaging events for asset prices. They simultaneously act as a catalyst for valuation multiples to correct (as investors become more risk averse) and as a catalyst for corporate earnings to falter (as top-line growth slows). As such, recessions have been the driver of most of the bear markets3 in modern U.S. history.

1 2 3 4
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.
Comments have been disabled on this post.