By David Andolfatto, Vice President and Economist, and Andrew Spewak, Senior Research Associate
The U.S. economy has been expanding for the last eight and a half years, but how much longer will that expansion last?
Hence, there is a concern that, even though the economy looks good right now, the next recession may be lurking just around the corner.
The unemployment rate, shown in the figure below, reflects the current state of the business cycle. On the surface, the economy is performing well, with few signs of slowing down. As of January, the unemployment rate was just 4.1 percent, as low as it has been in nearly two decades.
In U.S. economic history, it seems the longer an economic expansion continues, the lower the unemployment rate becomes. Thus, if a long economic expansion increases the likelihood of a recession, as the idea of positive duration dependence suggests, then a low unemployment rate may indeed suggest the increased likelihood of recession.
That said, positive duration dependence is one of many factors affecting the business cycle. In a 2010 study, economist Vitor Castro concluded that, while there is evidence for positive duration dependence, several other variables also play a major role in determining the business cycle.1
Even though positive duration dependence suggests that the U.S. may be heading toward a recession, other economic determinants may cause the expansion to continue unabated. In a more recent paper, Castro found that the evidence for positive duration dependence dissipates after 10 years of expansion.2
That result helps explain why some of the world’s developed economies have undergone long expansionary periods. For example:
If the U.S. expansion continues, positive duration dependence may not play too large a role in the coming years.
So far, the current economic expansion is the third-longest in the U.S. since World War II. The concept of positive duration dependence does suggest that the U.S. economy has become more likely to contract soon, but it’s not a guarantee. It is entirely possible that the U.S. economy will continue to expand for the foreseeable future.
1 Castro, Vitor. “The duration of economic expansions and recessions: More than duration dependence.” Journal of Macroeconomics, March 2010, Vol. 32 No. 1, pp. 347-365.
2 Castro, Vitor. “The duration of business cycle expansions and contractions: are there change-points in duration dependence?” Empirical Economics, April 2013, Vol. 44, No. 2, pp. 511-544.