Recession in 2017?

October 6th, 2016 by

There are once again more warning signs that the economy could dip back into a recession soon. For years during the “recovery,” growth has been steady but very slow, creating greater downward risks if any one piece of puzzle falters.

Using the Business Cycle

business cycle

Visual representation of the business cycle

While economics can hardly be said to have perfect predictive powers, there are established patterns that economic forces follow, such as the business cycle. The economy expands and contracts like the inhaling and exhaling of respiration. Obviously we would all like the expansions to be wider and last longer than the painful periods of contraction, but it never goes in one direction for very long.

This raises one of the concerns about the current state of affairs: the string of modest growth that has followed the end of the Great Recession is beginning to get long in the tooth. Everyone seems to be expecting a breakout into 1990s-style economic expansion at some point. However, the longer this mild growth continues, the more likely its end (and the beginning of a contraction) becomes.

Timing the Next Recession

recession

Source: http://nyphotographic.com/ CC BY-SA 3.0

Research conducted by analysts at Bank of America Merrill Lynch uses macroeconomic trends to create a probability range of when the next recession will hit. By looking at factors such as the spread between two-year and 10-year Treasury yields, loan growth, new building permits, and the popular ISM manufacturing index, the group compared these indicators to past recessions.

Based on their models, the timing of the next recession was projected to fall sometime between July 2016 and April 2019. The middle of this range falls in the second half of 2017, which the analysts characterized as “imminent.” Moreover, in terms of business cycles, H2 2017 seems like a reasonable end-point for a recovery that officially began in the second half of 2009.

Corporate Debt

There’s also good reason to worry about the ever-growing levels of debt, both private and national. Earlier this year, measures placed current corporate debt at $6.6 trillion—a $2.8-trillion, or 74%, increase from the end of 2010.

Source: ccPixs.com

Source: ccPixs.com

The only two instances in which the ratio of corporate debt to gross domestic product (GDP) have ever been higher directly preceded the last two recessions.

Mounting debt is typically associated with stagnant growth, as this slows the gears of normal commerce. Business Insider provides an apt explanation of how this could also trigger a recession: “The idea here is that as it becomes more expensive for companies to service debt, they will cut back on labor costs. In turn, consumers stop spending as they get worried about their jobs, and this decreases income for businesses, creating a cycle of slowing ending in recession.”

Any prediction about when something will occur in the economy should be taken with a grain of salt. Nonetheless, the data point toward a recession coming sooner rather than later.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.