In late 2007, the Great Recession began. It officially ended in 2009. Practically speaking, however, the United States continues to linger in economic purgatory. While the economy has not slipped back into recession, it has also proved incapable of grasping the brass ring of 3% year-on-year real GDP growth.
Capitalist economies are cyclical. Having survived nearly a decade without another recession, the natural question to ask is, “When is the next one?” To begin answering this question, I started with this list of US recessions from Wikipedia, doing a little extra research occasionally to clear up details.
Note: When there was only one year or less between recessions, I chose to combine them, effectively treating them as a single “double-dip” recession.
Some Basic Statistics
The average length of a recession in the United States has been about 2 years. If you restrict the timeline to the post-1928 world, that average falls to just over 1 year. After President Coolidge’s administration, recessions have had significantly less staying power.
From the beginning of one recession to the next, we have averaged a recession every 5.5 years. If you start measuring at the Great Depression, that value rises to a recession every 6.25 years. In other words, in addition to being shorter, recessions have been occurring less frequently for the last century.
Note: There have been many changes to the United States’ financial and economic systems since the 19th century, and I believe it is more relevant to use the values that start measuring at the Great Depression. Any further statistics referenced here will be based on those measurements.
Based on the average length of time from the beginning of one recession to another, the next recession should have occurred in late 2013. However, if you instead measure the time between recessions, the average is just over five years. As the Great Recession ended in 2009, that would place the next recession in early 2014. In either case, if we lived in an “average” world, we would have already entered and exited another recession by now.
What’s the Holdup?
Not that anyone is looking forward to having a recession, but one does wonder what is taking so long for this one to arrive.
I am not surprised that we skated past the average dates. Why? For one thing, we do not live in an average world. Recessions have been growing farther apart over time, not closer together. So if I were to place my bets on a recession arriving either ahead of schedule or behind schedule, I would wager the latter.
The nature of the Great Recession is another important factor. The previous recession’s typology matters. Initially there was talk of a V-shape or W-shape being most likely. Some argued for a U-shape. Looking back, I tend to agree with Mike Shedlock and say we entered an L-shaped recession, akin to what Japan experienced in the 1990’s: a long, drawn-out recovery featuring steady yet anemic growth. Perhaps the most creative shape used to describe our recovery belongs to George Soros (April 2009):
…an inverted square root sign. You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that. You settle down–step down.
An L-shaped recession takes longer to recover, which tends to result in a longer period before the next recession. And on top of everything, up to this point American financial and business leaders have done just as Charles R. Morris feared in The Trillion Dollar Meltdown (2008), which is to “downplay and to conceal.” This further obscures the mechanics of a future recession. Not only does that mean the next recession will be more difficult to see coming, but even the most wary investors and business leaders will not have any clear, obvious reasons to refrain from investing even as the ground imperceptibly trembles beneath them. So they will invest when they otherwise might not have, thus prolonging the “good times.”
If Not Now, When?
The standard deviation of the time from one recession’s start to the next recession’s start is almost 3 years. For the period from the end of one recession to the beginning of the next, it is about 2.5 years. Statistically speaking, without factoring any information besides the timing and lengths of past recessions, the probability that a recession would have begun by the time of the first standard deviation past the average date is 84.1%. That’s a pretty high probability.
So, using either of the measurements mentioned above, there is an 84.1% chance that a recession would have begun by mid-to-late 2016. Put another way, the likelihood that the year 2017 would have arrived without a recession in progress was less than 15.9%. Are you feeling lucky yet?
Let’s extend that out one more standard deviation. That puts us somewhere in early-to-mid 2019. There is only a 2.3% chance that we exit the summer of 2019 without having entered a recession. While this is not impossible, at that point we are certainly nearing the limits of probability. The only way we could reasonably expect to last beyond that point without a recession is if there has been a fundamental shift in the economic regime itself. I don’t believe any such shift has occurred or will occur anytime soon.
Are We There Yet?
Given all of the above, it is difficult to believe that we are not living on borrowed time. Why are we still recession-free? No doubt the energy markets played a role, with low prices and new domestic sources of oil and natural gas allowing for cheaper production costs (as well as a bump in energy exports). The dollar also weakened at an opportune time to allow for strengthened exports in general. For the most part, the US has wound down costly wars in far-flung places.
And just as all of those benefits may have been winding down, there was a post-election Trump Bump in the stock market, which might have translated into some gains in the real economy. And regardless of the long-term repercussions, a short-term bounce in the market and actual business is closely tracking the recent tax reforms. If President Trump manages to push through that massive infrastructure bill he’s been promising since the campaign trail, that could prop up the economy even longer.
In either case, it seems we have managed to buy ourselves some time. How much is anybody’s guess.