Calculating when the next recession will hit

Economic cycles tend to last between six and 10 years. Are you thinking what we’re thinking?

Specifically, if it’s been eight years since the last recession in the U.S., perhaps the country’s inching closer to its next one. After all, GDP results in Q1 were underwhelming, at 0.7%.

Far from being a concern only to Americans, the U.S. cycle concerns the world, because there’s a strong similarity between its cycle and those of other countries — largely because of U.S. consumer spending, which represents 20% of global consumption.

Timing isn’t everything

The current growth cycle in the U.S. has lasted 95 months, notes a Desjardins report by senior economist Hendrix Vachon. That puts the current cycle in third place for longevity among previous U.S. cycles. If it lasts one more year, the cycle will move into second place, currently held by the 1961–1969 growth period. Holding on for two more years would bump the cycle into first place, set by the growth period from 1991–2001.

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But longevity isn’t the best indicator of a cycle’s end, says the report, referring to other important data, like real GDP growth. That’s an indicator for which the current cycle isn’t setting any records, with real GDP growth of 17% so far. In contrast, the growth periods of 1961–1969 and 1991–2001 saw real GDP growth of 54% and 43%, respectively.

Further, other advanced nations — Canada included — have had demonstrably shorter cycles since the 2008–2009 recession. In Canada, a drop in oil prices triggered a two-quarter contraction in early 2015.

Contributing factors

Perhaps more of a concern than longevity is plain old time itself, which allows imbalances to mount, says the report, citing over-investment in housing and increasing public debt as examples of imbalances that preceded the 2008–2009 recession. And debt continues to rise in most all advanced nations, aided by low rates.

But, if rates rise, growth is impacted as higher borrowing costs force governments to cut spending and increase taxes. Further fallout would be experienced by those investing in fixed income, as bonds would lose value. And companies using bond financing would have trouble refinancing.

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Growth is also impeded if potential policies by the U.S. administration result in increased spending, thereby increasing public debt, or result in customs tariffs, thereby hurting global trade.

Lastly, don’t forget about surprise shocks, like extreme natural events (e.g., tsunamis), government budgets, political votes and scandals, all of which can hamper growth. Often, crises tend to occur randomly, following shocks that are often hard to foresee, says the report.

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Though the next recession is ultimately unpredictable, the end of the economic cycle in the U.S. won’t be as severe as the last one, thanks to a sounder financial system and households that are on more solid footing.

Read the full report.