How to Predict the Next Recession

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. πŸ™‚

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. πŸ™‚ 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 makesΒ 85% margin on popcorn and drinks.


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Tom from Dividends Diversify
01/29/2018 10:24 am

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

01/29/2018 12:21 pm

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

Financial Orchid
Financial Orchid
01/29/2018 2:48 pm

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.

frank the tank
frank the tank
01/29/2018 3:27 pm

how long is the typical american recession

01/29/2018 3:52 pm

When it happens, it happens. We cannot do anything to stop it, the best we can do is be prepared to handle it.

01/30/2018 12:24 pm

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.


[…] Freedom Thirty Five Blog shared some ideas on predicting the next recession. […]

Personal Alpha Investments
Personal Alpha Investments
02/04/2018 10:37 am

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. πŸ™‚

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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