The 2008 financial crash devastated the U.S. economy. Unemployment reached 10%, bailouts cost taxpayers $700 billion, and slowed economic growth cost the U.S. $648 billion in income.  The detrimental effects of the ‘08 crash, which extended to 2010, have led to concerns about when the next recession is coming. While unemployment is the lowest it’s been in nearly 50 years, top economists have begun to predict the next recession.  While individuals can prepare for recessions, ultimately it’s the responsibility of the government to prepare the economy for the next bust cycle. See why a recession may be on the way.

Is the next recession coming soon?

GDP growth, unemployment rates, yield curve differences, and past economic cycle length indicate that the U.S. has been in a sustained period of economic growth. While overall economic growth and inflation aren’t remarkably high, unemployment isn’t likely to go lower, and the boom and bust cycle of the economy indicates that we are past due for a recession. Additionally, a severe trade war could trigger this.

Yield curve difference

One of the most reliable predictors of recessions is the yield curve difference between 10-year and 3-month treasury bonds. When the difference between the 10-year and the 3-month yield curves decreases, this indicates that investors are anticipating slower growth on bonds.  Generally, the yield curve difference hits zero 6-12 months before a recession. The yield curve is anticipated to hit zero around mid 2019, suggesting a recession some time in 2020, according to the Federal Reserve Bank of St. Louis.

GDP

The ’08 recession had an unusually strong impact in terms of length and severity because of the financial crisis, and didn’t follow the usual ebb and flow of economic growth. It’s likely that the next recession will have less impact; the ‘08 crash was bad because of the housing market crisis and issues in the financial sector.  

Economic data indicates that recessions generally follow a period of high GDP growth, sometimes called overheating. Overheating occurs when the economy is so productive that the value of money goes down and production outpaces consumption. The last two recessions (2000 and 2008) were preceded by GDP growth levels of 3.8% and 4.9%, according to the Federal Reserve Bank of St. Louis

GDP growth jumped from 2.2% in Q1 2018 to 4.3% in Q2 2018.  (GDP growth is currently 3.5%). While GDP growth in general terms is good, too much can lead to overheating.

Inflation

Inflation is another indicator that the economy is overheating. When inflation rises, the value of money goes down and decreases purchasing power. A low level of inflation is good and means that the economy is growing, but too much inflation can cause overheating. Inflation in 2017 was around 2.1% but is predicted to edge up to 2.5% in 2018, according to the Bureau of Labor Statistics.

Business cycle length

Business cycle length indicates that we are past due for a period of economic cooling. The National Bureau of Economic Research indicates that business cycles generally last around 69.5 months, or just under 6 years. Counting from the end of the recession in June 2009, this would have suggested a recession around the spring of 2015.

However, since the 1990s, business cycles have been lengthening to about 106 months (just under 9 years), which would have forecast the next recession for the spring of 2018. Even the longest business cycle of 128 months, before the ‘08 crash, would indicate the next recession by late 2019, according to the National Bureau of Economic Research.

The Balance reported that we are in an extended expansionary period and still haven’t hit the peak of the business cycle. For the business cycle to trough, it first needs to peak, which requires a marked increase in inflation.

Unemployment

Unemployment rates are at a 49- year low of 3.7%, according to the Bureau of Labor Statistics. Although low unemployment is good, unemployment at a rate of zero can lead to inflation. The Federal Reserve Bank of St. Louis (FRED) provides data on the natural rate of unemployment, which is the lowest unemployment can go without triggering inflation. In 2018, FRED’s reported natural rate of unemployment was 4.62%.

Tariffs

While the tariffs imposed in the U.S. trade wars with China and other countries are relatively limited, another factor in predicting the next recession is the price of foreign goods and the ability for the U.S. to export. Tariffs can mean both higher prices for consumers and producers. Or, alternatively, the dollar can appreciate, which offsets higher prices but makes it harder for producers to export goods, according to the Tax Foundation.

So, when is the next recession?

Top economists have predicted that the next recession will come between 2019-2022. While business cycle length indicates that a recession should have come already, inflation and GDP growth haven’t increased to a rate that is concerning yet. The yield curve difference also indicates that a recession may come some time in 2019 or 2020, with  current government spending and tax cuts likely to heat up the economy and consequently lead to a recession.

 

Economist Emma Dahl is an analyst with The Foundation for a Better Economy.