A look at the US economy, and the next recession

Summary: Trump’s mad efforts to start trade wars puts the US economy under stress. The outcome of the 2020 elections depends on the performance of the US economy in the next 17 months. How strong Is the US economy? Is the expansion “old”? Can we predict the next recession, and take fast action to mitigate it? This is an update and revision of my October 2018 post.

Two people before a graph warning of a recession.
ID 125081618 © Iurii Golub | Dreamstime.

This expansion has run for 120 months from the 2009 trough, a tie for the longest expansion with 1991 – 2001 (see the NBER’s data since 1854. The Fed’s GDPnow algorithm estimates Q2 GDP at a still-healthy 2.0% SAAR. All expansions end in recessions. When will that happen, assuming Trump does not start one?

Indicators show our future

Professional economic forecasters see steady growth for the next 12 months. Unfortunately, economists have little ability to predict recessions. Surveys of economists’ consensus forecast have never successfully predicted a recession.  For example, look at the predictions made in February 2008. The consensus forecast for real GDP in 2008 was +1.8%; actual was 0.1%. Their forecast for 2009 was +2.8%; actual was 2.4%. The recession had begun in December 2007.

Some economists predicted that a recession was likely after 2005, but being pros, they were vague about when. I have found nobody that predicted the collapse of the global banking system, which turned a US real estate downturn into the Great Global Recession (see my series about some claims of successful forecasts: here, here, and here).

Let’s look at some methods used to predict recessions. None work well. I prefer the quantitative indicators, with little human input. My favorite is the Econbrowser Recession Indicator Index created by James Hamilton (econ prof at UC San Diego). The probability that Q2 was a recession was 2.4%. Not terrifying.

GDP-based recession indicator


There are other quantitative indicators, such as the index of US leading indicators: flattish since November 2010. There is also the OECD’s Composite Leading Indicator (an interactive display; select the nations and regions): slowing, below average, at the low end of the non-recession range. The Economic Cycle Research Institute’s Weekly Leading Index looks strong. These indicators show where we are; none are reliable guides to the future.

Other indicators look at the shape of the yield curve. See this graph from the Cleveland Fed, predicting 2% real GDP growth for the next 12 months. The yield curve has been among the most reliable economic indicators, but some economists believe it is no longer reliable.

These predictive tools show low odds of a recession in the immediate future.

Let’s get more granular!

What about the specific measures of economic activity that flood the business page. They excite journalists because their volatility generates easy headlines. Good news, bad news, the end is nigh! But most look ok, although there are signs of weakness. Auto sales remain strong. Housing starts remain stable. Inventories are high but stable. My favorite is the Cass North American Transportation freight volume index. As of May, volume is down year-over-year, but still up from 2017 (see the full report). It is one of the warning signs amidst the mostly good news.

Cass Freight Index - Shipments - May 2019

Stock prices predict recessions!

No, they don’t. There is a low correlation between stock prices and GDP, or anything else (on an ex ante basis). Investors in stock and bonds have no special insights, either as individuals or crowds. My favorite example was their inability to see WWI as it began. On the other hand, there are some indicators that the US stock market is grossly overvalued. It might be on the verge of a bear market, or even a crash.

Goldman Sachs Bear Market Risk Indicator

The good news is that a stock market crash would have only a small effect on the economy. The banks are much more important than the stock market. If they crumble, as they did after 1929 and 2008, then the economy crumbles too.

Has this economic expansions grown old? Will it die?

Although the numbers look fine so far, is a recession likely soon because the expansion is so old? Non-economists cosplaying economists in the news often say that this expansion is “living on borrowed time.” Glenn D. Rudebusch (Fed EVP) summarizes economists’ answer in “Will the Economic Recovery Die of Old Age?” in the San Francisco Fed’s Letters, 4 February 2016. He gives two graphs to answer this question. First, a simple mortality table shows that people grow old and die.

Age Mortality Table

See the same graph for economic expansions. Back then they aged and died. But the Great Depression and WWII taught economists about the value of economic stabilizers (e.g., unemployment insurance), plus fiscal and monetary stimulus. Since then the odds of recession ending each month increase only slightly over time. Expansions age only slowly and slightly. That is progress!

Probability of an economic expansion ending in a month

Trivia note: we are not in an economic “recovery.” Almost all measures of economic activity long-ago passed their previous peaks. This is an “expansion.”

AP Photo/Mark Lennihan

Why should we care?

We must stay vigilant, watching the economy. Policy responses are slow to take effect, so we need as much warning as we can get. Worse, today we are unprepared for a downturn. Monetary policy is the fastest tool to fight a recession. But with rates so low, interest rates cuts cannot do much. Fiscal policy is the other big tool. Trump’s tax cuts, part of the GOP’s long-term effort to make the rich richer – and bleed the Federal government – will make large-scale fiscal more difficult. An April 2018 CBO report gave this chilling warning about Trump’s large and rising deficits – unprecedented during an economic expansion.

“In CBO’s projections, budget deficits continue increasing after 2018, rising from 4.2% of GDP this year to 5.1% in 2022 (adjusted to exclude the shifts in timing). That percentage has been exceeded in only five years since 1946; four of those years followed the deep 2007–2009 recession.”

Keynes recommended running fiscal deficits during recessions – as a countercyclical stimulus – and surpluses during expansions. The GOP keeps cutting taxes during expansions, sending the Federal deficit skyrocketing. Reagan did it. Bush Jr. did it. Now Trump has done it. The Federal deficit was 1.1% of GDP in 2007. It zoomed during the recession as tax receipts crashed and expenditures rose (e.g., unemployment and welfare payments, and later the fiscal stimulus).

We will begin the next recession with a deficit of 4 – 5%. That is insane. The politics of stimulus programs will be complex, and might prove disastrous during the next recession.

Melancholy by Edvard Munch (1894)
Painting by Edvard Munch (1894).

What might happen in the next recession?

The worst affected area in the coming stock market crash will be the San Francisco Bay Area. Its biggest industry is selling dreams (e.g., stock certificates in unprofitable companies) for money, an industry that I expect to crash hard in the next recession. The accelerating exodus of middle-class families makes the region even more vulnerable.

Beyond that, we can only guess at the dynamics of the next recession. Much depends on the nature of the downturn and the government’s response. Many private and public pension systems are already weak, despite the long expansion. A stock market crash and long recession will push many past the point of recovery, as the date at which their cash flows turn negative approaches (i.e., more payments than contributions). See this about the coming bankruptcy of government pension plans. Also, boomers have saved too little for retirement, and too much of that is in real estate and stocks – both probably severe casualties of a long recession.

My best guess: it won’t be pretty. My advice: expect the unexpected, and start preparing now.

What kills expansions?

People often confuse signs of a slowdown (e.g., consumer confidence falls, economic activity slows) with the factors that cause the slowdown. Such as economic or political shocks. A partial list includes trade wars, real wars, monetary policy (excessive rate increases by the Fed, restrictions on lending, breaking growth of the money supply), fiscal policy (large cuts in spending, large tax increases), and popping of big investment bubbles. As with most disasters, multiple errors are usually necessary (a dozen mistakes, plus an iceberg, sank the Titanic). There are many links that can break in our complex world.

Two causes are especially common in the post-WWII era. First, the Fed brakes too hard to prevent “overheating.” Sometimes overheating means a rapid rise of inflation. Sometimes it means full employment forcing businesses to share productivity growth with their workers. “Profit inflation” is good in bankers’ eyes. “Wage inflation” is bad!

Second, “imbalances” in the economy. These can be excessive growth in government, consumer, or business borrowing – which ends suddenly, creating a shock. Or sector imbalances – such as the tech boom and the regional real estate boom-bust cycles.

The slow growth in real GDP after the 2008-2009 bust – roughly 2.5% from 2010 – 2017 – created few imbalances. Optimists cheered as the dawn of a new age the Q2 growth of 4.2% (SAAR) and Q3’s 3.5%. Just as they did in 2014: Q2 of 5.2% and Q3 4.9%. But those micro-booms fizzled. As this one might: estimates for Q4 are about 2.7% – despite the GOP’s massive debt-fueled fiscal stimulus (quite mad to do late in an economic expansion, when we should be reducing the Federal deficit).

Recessions and depressions are normal!

“Thou know’st it’s common; all that lives must die,
Passing through nature to eternity.”
— Queen Gertrude to Hamlet (Act I, scene 2).

Something will eventually end an expansion. Expansions are part of the business cycle, along with recessions – and depressions. They do not represent God’s judgement on our moral faults, or our failure to follow the One True Simple Ideology of Economics.

The US economy has been in a recession roughly 20% of the time since 1854. Depressions were frequent before the creation of the Fed and use of fiscal stabilizers. Recessions and depressions are less frequent now, but they still happen. Like extreme weather, we have to prepare for the inevitable.

The Future in our hand
© Siri Wannapat | Dreamstime.

For More Information

Ed Dolan (senior economist at the Niskanen Center) has some similar thoughts about the next recession, posted at Focus Economics.

Ideas! For shopping ideas, see my recommended books and films at Amazon.

If you liked this post, like us on Facebook and follow us on Twitter. For more information, see these posts …

  1. What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!
  2. Are conservatives right about the Fed? Is it a malign force in America? – Spoiler: no. Written during one of the Right’s bouts of hysteria about the Fed destroying America!
  3. Stratfor: Trump risks a trade war with China that cannot be won.
  4. A powerful defense of free trade by Ed Dolan, before Trump attacks it.
  5. Stratfor: will Trump end free trade in food, & wreck US farmers?
  6. Harsh truths about the Federal debt, showing how Left & Right lie to us.
  7. Today’s mythbusting: the Fed is not suppressing interest rates.
  8. About Trump’s mad trade war with China.

See the big picture about America’s economy

The Rise and Fall of American Growth
Available at Amazon.

The Rise and Fall of American Growth:
The U.S. Standard of Living since the Civil War

By Robert J. Gordon (Prof economics, Northwestern U).

From the publisher…

“In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, motor vehicles, air travel, and television transformed households and workplaces. But has that era of unprecedented growth come to an end?

“Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth challenges the view that economic growth will continue unabated, and demonstrates that the life-altering scale of innovations between 1870 and 1970 cannot be repeated. Gordon contends that the nation’s productivity growth will be further held back by the headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government, and that we must find new solutions.

“A critical voice in the most pressing debates of our time, The Rise and Fall of American Growth is at once a tribute to a century of radical change and a harbinger of tougher times to come.”


16 thoughts on “A look at the US economy, and the next recession

  1. Turning Japanese, the song and the reality of what it means may be two realities of the 2020’s.

  2. This is the other side of immigration, too many of us had one child or none and as we age who will pay for the ageing population?

    I have three children and always used to and do wonder why my kids have to pay for the selfish no or one kid families. A population needs to have 2,2 children in families on average, to replace itself.

    Lack of young people and their family formation expenditure and animal spirits is slowing the economy.

    I am a biased Catholic/Christian and I know it.

    1. Just a guy,

      That’s the usual reason given for open borders. A flood of unskilled workers, making a new underclass, will save us. Esp since the Democrats lure them to vote by offering free stuff, and incite destabilizing identify politics. Progress!

      Also, there are indications we are starting a new industrial revolution. In the past, these boosted productivity on a scale we could see at the time. But this one seems likely to also destroy jobs, especially for those with low skills. We might find that our new low-education underclass is an economic drain – not an asset. A highly educated, highly cohesive society with a shrinking population – like Japan’s – might be best positioned for the 21st century. See these posts for more about this.

      I suspect that future generations will look back on us and conclude that America’s big problem in the early 21st century was that we were stupid.

      1. Just a guy,

        I love this argument. Yes, my daughter should have to compete with her third cousin from Mexico for a scholarship or a job so that the dwindling middle class can save a nickel on a basket of strawberries. 🙄

        Ever been in a fast food joint lately? All the cashiers are being replaced by terminals. Sooner or later most of these low skilled jobs will be automated. When all these people end up on the dole, or worse yet, are left to starve, what will happen to the economy then?

        In fact, it is income inequality, not low population growth, that is responsible for slowing the economy. https://carnegieendowment.org/chinafinancialmarkets/79338

      2. Rando,

        I agree with you, but that is too narrow a picture.

        “it is income inequality, not low population growth, that is responsible for slowing the economy.”

        Per capita real personal income has been slowing since the 1960s. As have other similar measures. So rising inequality (i.e., distribution of income) is clearly a secondary factor.

        The root cause is probably the slowing rate of technological growth, which peaked in the early 20th century and slowed to a crawl by the 1960s (the advances in computers and communication are outliers in this). But, as I mentioned above, that slowdown appears to be ending. The new wave of automation you mention is just one facet of the new industrial revolution now beginning.

        As you said, brining in a horde of unskilled workers (and their families) now is quite mad.

      3. I discovered that the US Chamber of Commerce fully supports the mass immigration policies of the past several decades. It makes a crude kind of sense for business interests to support population growth from any source, as it is a big part of aggregate GDP. US business interests tend to get what they want in this country, so I suspect that Trump’s doings will not change the overall immigrant population number much.

      4. glouconx,

        Most of the core policies of the US are bipartisan. Both Left and Right love open borders.

        Business owners have loved mass migration since the 19th century. It hammers down wages and boosts GDP – hence sales and profits. The costs are born by the peasants.

  3. Good post. Question though: does one prepare for a recession by obtaining essential rescources in advance, or in some other way? Also, could you inform me as to your take on the antifa dataset please? I’m sorry to bother you about this, but I’ve been asking for a couple of days now. If you don’t want to discuss it, please tell me and I will stop asking
    Ps Part of the curiosity about said dataset is that you highlighted it on your social media outlets.

    1. Isaac,

      “{how} does one prepare for a recession”

      For a household, by careful management of debt and savings. Minimize debt payments, especially floating rate debt. Keep high savings, proportionate to your circumstances. That is, people with variable expenses (e.g., homeowners), variable income, or insecure jobs need higher savings than others. Everybody needs savings of at least 3 months core (bare bones) living expense. Few have it. Credit cards don’t count.

      “could you inform me as to your take on the antifa dataset please?”

      I am buried with work and personal tasks. That’s why I’m reposting so much content; no time to write. It’s in the queue!

  4. DARN YOU TO HECK, FM! Why do you insist on writing thought-provoking articles about topics which I care so deeply about?! That last was a rhetorical question, I would come here if you didn’t :-).

    Background: I am an AMATEUR economist who has studied predicting recessions for decades. Short version of the results of my efforts: Pretty much what FM already said, recessions are truly impossible to predict.

    More nuanced version: I’ve developed a set of indicators using historical data which show when recessions are more likely than normal and whether the recession will be a gentle sputter or a big bang. Accuracy of these indicators? I’ve predicted 12 of the last 5 recessions (but, hey, I correctly identified all 5 of the real recessions and was roughly accurate on how severe they were), if only I’d had the tools I currently have 20 years ago I’d have made a killing in the stock market simply by being less stupid and herd-like than everybody else!

    The big problem with these indicators is, to be slightly poetic, that they measure shadows rather than actual events. They cannot see ahead of time the big bright glaring X factor that casts no shadows but turns something like the 2000 recession into such a monster. Thus, using my indicators, you could see a much higher than normal chance of a recession (but still not statistically significant. The chance that a recession will occur at any given moment is approximately zero. Watching my indicators shift to a 2-3% chance, as they do around the 2000 historical data has led to quite a few false alarms in other situations), and that if one occurred, it would last longer than normal and would be deeper than normal, it could not foresee 9/11 and the effects thereof.

    That said, I’ll give you the benefit(?) of the public part of my research.

    Indicator #1: Is the US stock market showing greater than normal gains without supporting technical (by which I mean new technology) or profit reports to sustain it? YES! Companies reporting a 2% gain in annual profit recently have tended to see 5-15% gain in stock market price over the next couple of days and then a roughly 5% gain over the next 60 days. The market cannot continue this trend line forever.

    Indicator #2: If the response to indicator #1 is positive, what is the trend line for overreaction? Overreaction has grown significantly over the last 6 months.

    Example: Yesterday, I was looking at a stock for a small company in the general area of the real estate sector that showed 55% growth in price in 5 days with no data to support the growth. That is a recipe for catastrophe for the investors in the company. As a side note, I had seen indicators that suggested that stock was poised for growth so I put some money into 45 days ago. Yesterday I sold all my shares for just under 70% profit. I need tell you that I GOT RIDICULOUSLY LUCKY, DO NOT ATTEMPT THIS STUNT ON YOUR OWN. YOU WILL DESERVE THE BAD THINGS THAT HAPPEN TO YOU 99% OF THE TIME. The money I invested was money I could afford to lose if the company went bankrupt instead (which I almost expected, based on what I had heard). The only reason I mention it at all is to show HOW crazy the stock market can get. This particular stock (which I will NOT share with anybody for a variety of reasons) set a new record for insane growth in my data, and I am still watching it with great curiosity. It will not surprise me if it goes bankrupt by the end of next month. Live by the sword…

    The US stock market, as a whole, is not nearly as nuts as the example above but could be accurately described as frothy. That does not mean that it WILL go down, quite the contrary, it will probably go up until an unpredictable event occurs when the froth will multiply the effect of the event and make things much worse. The big question is: how frothy? I don’t really know yet and cannot find a good way to measure it. Moderate frothiness can be very nasty, but really crazy frothiness (like the example above) causes short, sharp devastating recessions.

    Indicator #3: What percentage of people are asking about the likelihood of recession and what is the overall economist consensus prediction? If a lot of people are concerned about recession but the overall economic forecast is for sunny skies ahead, there is a relatively high likelihood of recession (this indicator does NOT accurately predict the severity of the recession but has loose correlation with the length). I should also mention that there have been enough times when the economic consensus was accurate that I view this indicator with suspicion.

    Indicator #4: (which is even more subjective than the rest), What is the world diplomatic situation like? Times of high diplomatic tension tend to lead to sharp breaks with previous patterns, both up and down. Trump’s constant saber-rattling is currently good for the market (buy defense firms!) but will be extremely bad for the market if he actually gets called on it (either he’ll back out (sell defense firms!) or go through with it (which kills a lot of people and sours future investment opportunities), neither of which is usually good for long-term world-wide economic growth). Trump has been the most saber-rattling President in recent US history and he’s got people poised to jump in every direction.

    Indicator #5: Is the US about to start a Presidential election cycle? US Presidential election cycles tend to increase the likelihood and severity of recessions (the data is consistent but does not strongly support that last statement, by the way). I speculate that the election is a mental reset button (both good and bad) for investors.

    As you can see from the above indicators, I would expect a short, sharp recession in the next 8 months of unknown severity (could drop the US economy by 1% for 6 months or it could drop us into a major depression, both outcomes are equally likely at this time).

    As FM says, I’d avoid speculative stocks and start building a cash reserve (if you haven’t already done so) of 1-3 months if you are concerned your job might be affected. By the way, if everybody followed my advice at the same time, they’d automatically cause a mild recession.

    Trump can keep the stock market (and probably the economy) bubbling with positive comments and little gifts for a maximum of 200 days. But the longer he succeeds, the longer and more serious the resulting downturn will be.

    Final message: Good luck everybody, WE’RE ALL GOING TO NEED IT!!!

    1. Pluto,

      “I’ve developed a set of indicators using historical data which show when recessions are more likely than normal and whether the recession will be a gentle sputter or a big bang.”

      Congratulations. The Nobel Prize in Economics is yours for the taking.

      Wall Street and other financial and governmental organizations employ some of the brightest people on the planet to do economic modeling, including economists, mathematicians, and physicists. They use super-computers. You believe you have done what they could not!

      I suggest some skepticism about your accomplishments.

    2. Sorry, FM, but I must disagree with you.

      As continually noted in my comments, the accuracy of my indicators is low. Far too low for Wall Street and other large organizations to stake any reasonable amount of money or effort on them.

      Just to add to the chaos: As near as I can tell, if large organizations successfully use these indicators, they will skew the results to make them inaccurate.

      I do this strictly as a hobby and enjoy it. As noted in my original post, anybody who actually relies on these indicators as more than a general guideline will deserve the remarkably bad things that will almost always happen to them.

      I only decided to share the results of my research because Trump has managed to create one of those rare moments where I have more faith in the indicators than normal (and I would still not be surprised if I was completely wrong, reality is a harsh, but useful, teacher).

    3. Let me be a little more clear: I strongly DISAGREE with FM’s nominating me for the Nobel Prize in Economics.

      At the same time I strongly AGREE with FM’s suggestion that we should all be skeptical of my predictions.

      If it wasn’t for Trump, I wouldn’t even have the confidence to publish the predictions. The man is an amazing economic fool, and, at the same time, an extraordinarily accomplished media manipulator. But we cannot know the future and it is still quite possible (30-50% chance?) that any economic pitfall could be multiple years away instead of the less than 8 months that I predicted. Only time will tell…

      1. Pluto,

        “If it wasn’t for Trump, I wouldn’t even have the confidence to publish the predictions.”

        You are welcome to your hobby. I collect books, which I hope to read (perhaps in the hereafter, if I can bring them there – and they don’t burn up). My grandmother collected scraps of fabric (intending someday, perhaps in the hereafter) to make them into quilts. There is no right or wrong in harmless hobbies.

        However, these are serious discussions about vital matters. Economic forecasting is like neurosurgery, not amateur hour and not a time for show and tell.

        To put this in perspective, as noted in this post, economists’ non-quantitative forecasts have little predictive skill. I mention their consensus forecast because some people pay attention to it (I don’t).

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