How to Predict the Next Recession

The Next Recession is Coming

Although not directly correlated to the stock market in the short term, the economy also experiences cycles of ups and downs. Here are some graphs that have historically been very reliable when used to forecast recessions in the United States. Recessions occur when the total economic output of the country declines in two consecutive 3-month periods.

The Yield Curve is Flattening

The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion phase. The vertical gray bars on the graph represent periods of recession. Every time the yield difference falls below 0% a recession happens soon after. Looking at the chart it appears we’re approaching 0% again.

Unemployment Rate Nearing A Turning Point

A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. In the past a long period of declining unemployment rate has always lead to a spike up and a recession.

This rate has fallen from 10% eight years ago to 4% today. Practically speaking it cannot go much lower than this. The lowest the rate has been over the last 60 years is 3.5%. So this downward trend in the civilian unemployment rate is almost over. It’s not hard to imagine what will follow after the rate stops heading lower.

Long Term Unemployment About to Bottom Out

Similar to the chart above, this one shows the number of civilians who are unemployed for longer than 6 months. This chart has nearly 70 years of data. After each time the rate falls over multiple years it eventually changes course and moves back up, usually very quickly, and pretty much always accompanied by a recession. As the population grows in the U.S. the bottom of these cycles adjust to higher levels over time. It has fallen from nearly 7,000 to less than 2,000 now. It doesn’t have much room to drop from here. And when it rebounds it will probably result in millions of Americans losing their jobs.

Recency bias causes many people to more prominently recall and emphasize recent events than those in the distant past. But looking at economic data that spans many decades can help keep things in perspective. Although history doesn’t repeat itself exactly, at least there are trends and recognizable patterns that we can use to help us make better long term decision plans. 🙂

Looking at these three charts today it is understandable to assume that we are probably heading closer to the next recession in the U.S. The good news is an economic downturn doesn’t seem like it’s in the immediately future. Given how we have not hit any inflection points yet my best estimate for when the next recession will happen is sometime between 2019 and 2021. If this turns out to be correct then we have some time to prepare. 🙂 My point is that we are at the tail end of an economic expansion. The good times are coming to an end, so let’s get ready for change.

The next market correction could start as early as later this year, or maybe the bull run will continue until after the next presidential election. We can’t time recessions with 100% accuracy. But let’s keep an eye on these economic charts and look at the data again a year from now.

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Random Useless Fact

Movie theaters make a lot of profit from concession sales. For example, Cineplex makes 85% margin on popcorn and drinks.