Random Corner - The Next Recession - EdsCave

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Random Corner - The Next Recession

Random Corner

This evening I am waiting to see how much snow is going to fall tonight - not out of any particular love of snow, but in order to be prepared for the situation tomorrow morning. To help me in this, I look at weather forecasts. Similarly, from an economic preparedness standpoint, it would be valuable to know when the next recession is likely to hit.

In 2007 we had the worst recession since the Great Depression of the 1930's.  The National Bureau of Economic Research (www.nber.org) defines a recession as "a significant decline in economic activity spread across the  economy, lasting more than two quarters which is 6 months, normally visible in real  gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales".  Another definition I like a bit more is the joke that when your neghbor is out of work, it is a downturn; when you are out of work, it is a recession;  when an economist is out of work it is a depression.

For the past five decades, recessions seem to come about every 6-10 years, as shown by the chart below, which overlays the various U.S recessions with the unemployment rate. It is easy to see that the recessionary periods are linked to rapid increases in unemployment. The rise in unemployment, however, is not a leading indicator of the recession - so adverse events like the bottom falling out of the stockmarket come before the spike in unemployment, and not after.

If one looks a bit closer at the unemployment data, however, it seems that before the onset of a recession, unemployment falls and stabilizes for a number of months near a local minimum, as can be seen in the chart below, which shows unemployment levels in the months leading up to several recessions (months -24...-1) and the first three months of the recession (months 0...3).  While the absolute level of unemployment varies quite a bit, the overall pattern of unemployment dropping, then hitting a trough seems to hold.  1981 (top line) is a different pattern, but this is because there was a recent recession in 1979, hence the prior positive jump in unemployment. At the current time, it is interesting to note that we have been sitting in a trough of 4.1% unemployment for the past 4 months.  Are we a few more months away from a recession, or will the unemployment rate burble around the trough for a year or so longer as it has done in the past?

Or will unemployment continue to decrease and the next recession will not occur for several year?  Stay tuned for further developments - as if you, a participant in our wonderous economy, really have much of a choice in the matter.

7 Mar 2018

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