By YiLi Chien, Senior Economist, and Paul Morris, Research Analyst
Recent global growth concerns have caused significant stock market turmoil since August 2015, when China devalued the yuan. The potential slowdown in the rest of the global economy has renewed concern of a recession beginning in the U.S.
In addition, U.S. economic recovery since the Great Recession has been slow. Although the unemployment rate has dropped from 10 percent to under 5 percent, many other labor market statistics still show some weakness. For example, Federal Reserve chair Janet Yellen cited elevated involuntary part-time employment, low labor force participation and slow real wage growth in her December remarks. The slow labor market recovery and vivid memories of the Great Recession may exacerbate concerns of a future recession.
This short article first investigates the possibility of the next recession occurring soon from the perspective of U.S. business cycle history. We reviewed the business cycle frequency of the U.S. economy after World War II.1 The figure below plots the year-over-year U.S. real gross domestic product (GDP) growth rate since 1948.
There have been 11 business cycles with an average expansion period of 58.4 months, albeit with a large deviation. The shortest expansion lasted only 12 months, and the expansion starting in March 1991 was the longest at 10 years.
How does the current expansion compare? Despite the slow recovery, the U.S. economy has been expanding for upwards of 80 months, obviously longer than the historical average of 58.4 months. From this perspective, the U.S. economy may be due for the next recession.
However, if we look at the figure more closely, we can see that business cycles have generally gotten longer over time. The more recent episodes of expansion have lasted longer on average than those before the 1980s. For example, among the three most recent cycles, the expansion periods are 92, 120 and 73 months after the 1981-82, 1990-91 and 2001 recessions, respectively. All three are longer than the historical average. The prolonging of business cycles suggests that the U.S. economy might be becoming more stable relative to earlier periods, thereby alleviating some of the concern of an upcoming recession.
What economic indicators can be used to predict an upcoming recession? Unfortunately, there is no reliable way to predict the economic growth rate, making it difficult to forecast when the next recession will hit. However, financial market participants often depend on real-time measures, like the manufacturing purchasing managers index2 or the unemployment insurance weekly claims report,3 to assess the current health of the economy. The overall readings for both do not indicate signs of an immediate recession.
1 U.S. business cycle expansion and contraction reference dates are available at http://www.nber.org/cycles.html.
2 The manufacturing purchasing managers' index, derived from survey results by the Institute for Supply Management on a monthly basis, indicates whether the manufacturing sector is expanding or contracting.
3 Released each Thursday by the U.S. Department of Labor, the unemployment insurance weekly claims report details the number of initial claims for unemployment insurance on a national and state level over the past week.