The Next Recession

Our anecdotal sense of the business cycle can diverge significantly from the formal accounting. The former often depends on sentiment and our experience in the labor market as much as aggregate economic expansion. Many Americans would balk at the notion that the Great Recession has been over for nearly five years. That is unsurprising when seen through the lens of our deeply disappointing job creation trends.

While it has taken some time, investors and consumers outside the gateways have been growing increasingly confident. We still lack national momentum in new job numbers, but rebounding home prices and record-high stock market indices are both contributing to restored wealth and more positive assessments overall. For many market participants, concerns about the next recession rank well below immediate issues such as higher interest rates. That's fair in a myopic world. Contemporaneous measures of recession probability (see Chauvet and Piger) show de minimus risks of contraction in the offing.

Economists have shown a very limited aptitude for prognosticating the business cycle far in advance of an inflexion. Nonetheless, our perception of the recovery's timing presents a challenge for investors and lenders. In the recorded history of the US business cycle, we have only one instance of an expansion lasting as long as a decade. Over the last twelve business cycles, the trough-to-peak expansion has endured for just under five years on average. Check your calendar. If the current expansion was average in its timing, it would be nearing its end. History's best case, the five-year loan you make today will get a very real-world stress test.

There is no doubt the last downturn was different, both in terms of its duration and severity. Economic expansions have also lasted longer of late. That being said, it would be imprudent to dismiss the potential for today's acquisitions and originations to mature under unfavorable economic conditions. Unless you believe this expansion will prove an outlier, history in isolation suggests the next recession is within our current five-year investment and lending window.