The United States economy, not to mention the global economy, has enjoyed one of the longest expansionary periods in history. But it has been an odd expansion, with a comparatively weak recovery rising out of the deepest recession in decades. Today, with economic and political storm clouds creeping over the horizon, many investors, policymakers and business leaders are asking the same question: Are we on the brink of another downturn?
No one has a crystal ball, but there are signs we may indeed be approaching the top of this long bull market at long last. But there are also signs of hope. Given what we know about the current state of the economy, there is reason to believe the next recession will be more “normal” than the Great Recession of 2008.
While recessions are rarely pleasant, the thought that the next one will be relatively mild is somewhat encouraging.
Indicators of recession
The start date of recessions cannot be predicted with any certainty, but we can put together a picture through the use of various economic and market indicators. One of the chief signs of an impending economic downturn is a reduction in spending on durable goods.
When consumers are worried about the economy, are losing their jobs or otherwise facing financial strain, they tend to put off spending on durable goods. This behavior has been demonstrated to help kick off recessions.
For Americans, this chiefly means housing and vehicles. Arguably, housing is the more important indicator since it represents the biggest purchase most Americans - or any consumers - make. In that sense, the housing market plays a role in actually driving the economic cycle. Auto purchases, on the other hand, serve more as signal than economic driver in their own right.
Flashing red
So by looking at the latest durable goods purchasing information, we can get a sense of economic health. Right now, things do not look great.
On the housing front, there are clear indications of soft demand. New housing starts are about the same as in 2016, indicating a peak - or at least a substantive stall - in the market. 2018 has also seen a downturn in house purchases across the country.
When we look at auto sales, the picture is no rosier. Sales have fallen substantially this year, and it seems as if demand has peaked. This comes in spite of extremely low fuel prices. Softening car demand has led a number of automakers to begin retrenching financially and operationally, evidently in anticipation of a downturn in the near future.
A softer landing?
Despite the gloom in the durable goods market, there is some reason to be hopeful that the next recession will not be quite so bad. The proactive moves by automakers suggest they will not be caught off guard in the same way they were in 2008.
Additionally, businesses continue to invest heavily, with the St. Louis Fed reporting levels well in excess of pre-Great Recession levels. Those investments will likely be pared back in the event of a broader downturn, but they indicate that businesses are investing for the long term already. That ought to soften the disruption to companies and industries that a recession can otherwise bring.
Furthermore, the current expansion, while long, has been far from staggering. The housing market never recovered to pre-2008 levels, so any fall will likely not be nearly so hard or disruptive. The long anemic growth cycle may end up making for a relatively mundane recession.
Verdict
The scale and length of a recession, like its starting date, cannot be adequately quantified or predicted in advance. All we can do is look for signs and indicators to get a picture of how things are likely to shake out when the inevitable occurs. In the case of the present economy, things are looking fairly shaky. A recession may well be imminent.
But if there is a recession, it looks like it will not be nearly so agonizing as the last one. Thanks to a more stable and slower expansion, the economy looks like it can weather a storm without foundering. That would be a big step up from last time, relatively speaking.
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