The Next Recession is Coming
Although not directly correlated to the stock market in the short term, the economy also experiences cycles of ups and downs. Here are some graphs that have historically been very reliable when used to forecast recessions in the United States. Recessions occur when the total economic output of the country declines in two consecutive 3-month periods.
The Yield Curve is Flattening
The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion phase. The vertical gray bars on the graph represent periods of recession. Every time the yield difference falls below 0% a recession happens soon after. Looking at the chart it appears we’re approaching 0% again.
Unemployment Rate Nearing A Turning Point
A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. In the past a long period of declining unemployment rate has always lead to a spike up and a recession.
This rate has fallen from 10% eight years ago to 4% today. Practically speaking it cannot go much lower than this. The lowest the rate has been over the last 60 years is 3.5%. So this downward trend in the civilian unemployment rate is almost over. It’s not hard to imagine what will follow after the rate stops heading lower.
Long Term Unemployment About to Bottom Out
Similar to the chart above, this one shows the number of civilians who are unemployed for longer than 6 months. This chart has nearly 70 years of data. After each time the rate falls over multiple years it eventually changes course and moves back up, usually very quickly, and pretty much always accompanied by a recession. As the population grows in the U.S. the bottom of these cycles adjust to higher levels over time. It has fallen from nearly 7,000 to less than 2,000 now. It doesn’t have much room to drop from here. And when it rebounds it will probably result in millions of Americans losing their jobs.
Recency bias causes many people to more prominently recall and emphasize recent events than those in the distant past. But looking at economic data that spans many decades can help keep things in perspective. Although history doesn’t repeat itself exactly, at least there are trends and recognizable patterns that we can use to help us make better long term decision plans. 🙂
Looking at these three charts today it is understandable to assume that we are probably heading closer to the next recession in the U.S. The good news is an economic downturn doesn’t seem like it’s in the immediately future. Given how we have not hit any inflection points yet my best estimate for when the next recession will happen is sometime between 2019 and 2021. If this turns out to be correct then we have some time to prepare. 🙂 My point is that we are at the tail end of an economic expansion. The good times are coming to an end, so let’s get ready for change.
The next market correction could start as early as later this year, or maybe the bull run will continue until after the next presidential election. We can’t time recessions with 100% accuracy. But let’s keep an eye on these economic charts and look at the data again a year from now.
Random Useless Fact
Movie theaters make a lot of profit from concession sales. For example, Cineplex makes 85% margin on popcorn and drinks.
F35, Thanks for the macro economic insights. I think I have heard a funny expression before that “economists have predicted 8 out of the last 4 recessions.” I don’t mean to make light of the topic. As you say in the closing, it is very hard to predict when the next downturn will start. All we can safely say is it will come sometime. That is for sure. Tom
That’s a funny saying because it’s so true, lol. Economists and weather forecasters are good at getting things wrong.
Thanks for presenting the analysis, F35. I agree that we are on the verge of the next recession. Will be interesting to see if the central banks decide to let things play out or force a new “Powell Put”.
All the best
Yeah, who knows. 🙂 My bet is that Powell will support the financial markets even better than Yellen did. He’s got a better relationship with the president. Since Trump decided to own the recent stock market rally Powell may decide to implement more dovish policies to not trigger a major correction.
I’m such a sucker for movie popcorn. Since I’m going for the experience, I tell myself I might as well splurge for a good time out especially if I’m already paying half price for the ticket on Tuesday night.
Tuesday night is best night. 🙂
how long is the typical american recession
Every recession seems to be different. The last recession lasted 18 months, but the average recession since World War II has only lasted 11 months. 3 of the last 5 recessions have lasted 8 months or less. The longest economic downturn was the great depression which lasted for a decade from 1929 to 1939.
When it happens, it happens. We cannot do anything to stop it, the best we can do is be prepared to handle it.
I agree. It’s like earthquakes. Not much we can do to prevent it. But we can be prepared and have get insurance put in place.
Things are different this time around. What this article doesn’t highlight is in 1980 the 10Y yield was 12%, in 1990 it was 8%, in 2000 it was 6%, in 2008 it was 4%. We are now at less than 3% with massive central bank balance sheets and massive debt in the system.
This correction could very well be far different from those in the past because of this and despite this.
The asset bubbles are now bigger than ever thanks to low interest rates. I was at an investment conference last week. One of the presenters said when the next correction comes it won’t be just a financial crisis, but it will also be a currency crisis because people will start to lose faith in the system itself. But who knows what’s actually going to happen. All we know is that a recession will come eventually, and like you said, it may look very different this time than in the past.
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Nice timing with the article. I am sure it will get more hits this weekend considering the market performance in the past 3-4 days. 🙂
On topic, I look for news or talks that guarantee stocks as “sure bets.” That is when I get more careful about days to come. Add the income to debt ratio to it, and optimism all around, and you get a better picture.
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