Mike O'Donnell | Oct. 17, 2018

Recession is coming... NOT!

October marks the 112th month of steady growth since the Great Recession ended in June 2009, making it the second longest recovery in the history of the United States.

Because this current recovery has been going on so long, pundits are increasingly assuming that we are close to the next recession simply because the recovery has been going on so long. The presumption that time is the sole factor in determining when a recession occurs is, of course, illogical but it is certainly convenient if you want to create headlines and get people to read an article.

The economic definition of a recession is two consecutive quarters of negative economic growth as measured by the gross domestic product (GDP). Using that definition of recession, we have seen eleven recessions in the US since World War II with the longest post-recession recovery occurring from 1991 to 2001, some 120 months of low unemployment, huge productivity gains (because of massive technological advances), and, even a few years of federal budget surpluses, if anyone knows anything about those.

Aside from the complex task of counting months, another apparently legitimate way of predicting when a recession will occur, is to ask some highly regarded market economists.  And so, according to a recent survey of 51 economists by the National Association for Business Economics, 56% of them expect the next recession to begin by the end of 2020, 33% by the end of 2021 or later, and, the five most pessimistic ones expect that the recession will start next year (which is when I think these five anticipate retiring).

And why do most of these highly regarded economists anticipate that the current recovery will easily become the longest ever? (We’ll ignore those five curmudgeons for the purpose of this article.)

From where I am sitting way over here, there are two main reasons:

1. Around two-thirds of the GDP measure is driven by consumer spending and despite everything else that is going on in the world, US consumers like to spend money on things they feel they need or do in fact need, which is continuing to fuel US economic growth. (I might have to add myself to the five curmudgeon economist here because I am a very poor consumer and rarely contribute anything to GDP growth.)

And the great thing about all this spending is that consumers aren’t borrowing lots of money to do so, which they did in the run-up the Great Recession. This is a really good sign. The household debt service ratio (debt payments as a percentage of disposable personal income) for Q2 of this year was 10.3%, an historically low number and well below the peak of 13.2% in Q4 2007, before the wheels fell off. Household net wealth in the US is also stronger than it has ever been. Collectively, US consumers own about $116.3 trillion worth of assets and owe only about $15.6 trillion in, mostly, home mortgages. 

The only offset to this positive consumer news is that our friends in the federal government (which is where I bet those five economists work) are expected to push the federal debt, which was 76.5% of GDP last year, to around 96.2% of GDP in 2028. The only time it has ever been higher than either of those numbers was during World War II.

2. A slightly more statistically relevant indicator of when the next recession might be due is not how many months have elapsed since the last recession ended but how many months have elapsed since the economy rebounded after that last recession to pre-recession levels. Most of the post-World War II recessions were coupled with quick recoveries. Not the Great Recession! It wasn’t until around June of 2017 that the US economy returned to the pre-Great Recession 2007 peak, which means that we are really only 17 months into the recovery using that metric.

And the average recovery time (see chart) moving above the prior peak for the three recessions prior to the Great Recession, was 71 months. If we assume that this current recovery will continue to be at least average, and there are no indicators that lead us to think otherwise, we have at least another 4.5 years of runway before we see our next recession. So, 2023?

There are plenty of other indicators that we could explore but with wages rising now, unemployment low, consumers continuing to spend, the economy doing well (although there are still some geographic regions lagging behind), there is nothing to indicate the next recession will hit any day soon. And if I was a betting man, speaking of the Melbourne Cup, I will be punting on 2023, an improved filly with a good track record and plenty of staying power in the wet.

What do you think?