When will the next US recession occur?

This was the question posed by Jesse Livermore (@Jesse_Livermore, philosophicaleconomics.com) in a poll he posted on @Twitter last night.  At the time of this writing, 15% of respondents thought it could still occur this year, 34% believe it will occur next year, 26% believe it will happen in 2019 and a quarter of respondents think it will begin in 2020 or beyond.  I am confident that had this question been posed last year, many would have predicted 2017 as the beginning of the next recession.

We have reason to believe something wicked this way comes.  We survived the financial crisis, yet the culprits (big banks) were not punished effectively (still too big to fail) and interest rates have been held at or near zero since 2008.  Politics seems to have invaded the space of economists at the Fed and the market seems to know what the Fed will do before they announce monetary policy.  Many top independent economists are highlighting the bubbles that have now formed in student loans, car loans and the titanic funding gaps in pension funds.  The data provided is indeed quite alarming.

To predict the next recession is extremely difficult.  The financial issues stated above have a tendency to linger, while everyone looks for the catalyst that will send the US into a tailspin.  In fact, for months I have stated that all this does is put more bricks on the wall of worry.  Guess what, the market is still climbing.

One of the first boosts to equity markets occurred in mid-2016 when the NFIB survey showed that small business momentum was picking up.  Then the Donald won the presidency with promises of a repeal of Obamacare and “huge” infrastructure investment.  Trump has been dealt a number of setbacks, yet the market keeps climbing with very low volatility.  Many think that a rise in volatility is predictor of worse things to come in equity markets, but that is not the case.  Volatility is simply a measure of the change in price, not the direction.

The widely accepted definition of a recession is a period in which the GDP growth rate is negative for two quarters or more.  There are few indicators that are able to consistently predict a recession and the best is the inverted US Treasury yield curve.  Most analysts focus on the 10yr-2yr spread, though I tend to focus more on the 30yr-2yr spread, due to my use of TLT and the 30-year Treasury in my investment models.

 

fredgraph-5

It the graph above, the shaded areas represent US recessions.  As you can tell, the yield curve is capable of inverting well before the recession begins.  So, it seems that the US is still quite aways from the next recession.


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