Is The U.S. Due For A Recession?

from the St Louis Fed

— this post authored by David Andolfatto

The U.S. economy has been expanding for the last eight and a half years, but how much longer will that expansion last?

On the one hand, economic conditions show few signs of slowing down.

On the other hand, economists have found evidence of “positive duration dependence,” which says that the longer an economic expansion goes on, the more likely it is to end soon.

Hence, there is a concern that, even though the economy looks good right now, the next recession may be lurking just around the corner.

Unemployment Rate as a Signal

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.

Does the current low unemployment rate imply that a recession is imminent? In the past, the unemployment rate has always hit a low point just before a recession. For example:

In 1953, it reached as low as 2.5 percent before the economy began to contract.

Prior to the Great Recession from 2007 to 2009, the unemployment rate fell to 4.4 percent.

Unemployment Rates and Economic Expansions

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

Countries Experiencing Long Economic Expansions