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.