The 2020 (US) Recession

Summary: This post is based on a research note I wrote asking whether low unemployment is sustainable. The answer is a clear no for the US. Low level of unemployment are good predictors of the tail risk event of a recession, a sharp increase in unemployment rates. These dynamics are related to the build up of financial and macroeconomic imbalances. If this pattern is to be repeated, and given the current level of the unemployment rate, a US recession must be around the corner. For details on the analysis, the research note including additional results is available on my web site: Fatas (2019).

A few months away from the longest US expansion

The US economy is a few months short of beating the longest expansion ever, which took place from March 1991 to March 2001. As we approach this milestone, there are increasing concerns about the possibility of a recession in the coming years.
Do expansions die of old age? The empirical evidence suggests that this is not the case. There is no clear correlation between the length of an expansion and the probability of a recession (Rudebusch (2016)).

An alternative definition of age

There is an alternative way of thinking about the age of expansion, in terms of how much economic slack there is left. Expansions are periods where the economy is returning to full employment. As unemployment becomes low and reaches levels around or below the natural rate of unemployment, is it possible to maintain this state for a number of years? Or does “full employment” automatically lead to imbalances that represent the seed of the next crisis?

In the case of the US, history suggests that “full employment” is not a sustainable state and that once we reach such a level a sudden increase in unemployment is very likely. In the figure below I plot unemployment rates around the peak of each of the last five cycles (where zero represents the month the recession started). I plot 5 years before the recession started and 10 months after the recession.

1 2 3 4
View single page >> |

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.