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The Recession is coming, the Recession is coming!

Paul Revere

One if by land and two if by sea? Like Paul Revere’s famous ride, we should expect the next recession soon. Why is it coming soon, and how soon is it coming, you ask? Well, let me show you a chart of the most recent recessionary periods and when they occurred. Below is a figure of the growth of the US Gross Domestic Product (GDP) from the Federal Reserve website in St. Louis (FRED). Notice the grey columns, which represent recessions. Notice how they are spaced about 7-10 years apart.

US GDP and recessions

This chart shows that it has been almost 10 years since the beginning of the last recession (The Great Recession), and on-average, the business cycle is about nine years long. Does this mean that the next recession is overdue? Not necessarily, because the peak of the last recession was the depths of the 2008 financial crisis, and the end of the last recession was 2009. If we simply add nine to 2009, that becomes 2018, and I believe that the recession will occur no later than then. How will we know when the recession has started? If you lose your job due to layoff, that could be a clue. But even if you are not affected by downsizing, the recession could affect you. One of the recessionary effects that will impact most Americans is the stock market. Recessions tend to significantly affect stock prices, and that could impact your personal wealth.

Tools and techniques are available to help predict when the next recession or the next expansion may occur. One tool is the yield curve. The yield curve shows the difference (or the spread, in basis points) between the short-term and long-term rates on US Treasury securities. If the short-term rates are lower in the curve than the long-term rates by 100 to 200 basis points, then this is a “normal” curve, and the economy is healthy. If the yield curve is “inverted” – that is, if the short-term rates are higher than the long-term rates – then the economy is primed for a recession. Another tool to determine the imminence of the next recession is the price of oil. Sharp increases in the price of oil tend to immediately impact the economy and start a chain reaction that ends with the start of the next recession.

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