Excellent Adventure Or Bogus Journey? How The Next Recession May Unfold

Markets are struggling. Global growth is slowing. And as attention increasingly turns to the possibility of a recession, it’s time to stop pondering when an economic slump will set in, and focus instead on what it may entail.

In short, we believe a recession appears in store for the U.S. by the end of 2020—and possibly sooner. Why? The recent slide in U.S. equities—the S&P 500® Index dropped nearly 14% last quarter1—suggests that the bull market likely peaked early last fall. In the post-World War II era, markets have reached their high point, on average, roughly six months before a recession—and the longest distance from a market peak to a recession has been 12 months (although the 1987 bear market was outside of a recession).

 

Source: Thomson Reuters Datastream, National Bureau of Economic Research, Russell Investments

While it’s impossible to nail down the precise timing of the next economic slump, absent a crystal ball, there’s little doubt in our minds that the economy will experience at least two consecutive quarters of declining GDP (gross domestic product) growth—the definition of a recession—by the end of  2020. Although the calendar alone does not drive recessionary risk, this economic cycle has lasted a very long time: If the nation’s economy is still churning in August, the current period of U.S. expansion that began in June 2009 will officially become the longest on record—surpassing the 120-month stretch of growth from March 1991 to March 2001.2 Put another way, never before in the history of the U.S. will a recession have been avoided for such a length of time. During this time, economic imbalances have built up—as they always do—and these areas of unsustainable economic activity will, in our mind, end in recession. But, will the next U.S. recession be as severe as the last?

Our answer: Highly unlikely.

The next recession: No 2008 sequel

Mere mention of the word recession sends shivers down the collective spine of many in the industry, as the first thought that comes to mind is 2008: the global financial crisis (GFC) and the staggering Great Recession that accompanied it. But, remember that 2008 was the second-worst pullback in the U.S. economy on record, topped only by the Great Depression. In other words, from a recession standpoint, it was much more of an anomaly than a norm.

What’s more, the Great Recession was consumer-driven, sparked by record levels of debt. Consumer-led recessions, in particular, tend to be extraordinarily painful. Why? Because as personal debt levels rise, people are forced to use income to pay down debt. This, in turn, leads to a sharp reduction in consumer spending—a real problem in the U.S., where consumer spending accounts for roughly 70% of the economy.3

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DISCLOSURES Opinions expressed by readers don’t necessarily represent Russell’s views. Links to external web sites may contain information ...

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