US Economic Outlook - James Petokoukis

Will the US economy enter a recession next year — or just keep going and going and going? Here are the odds

Economic Fluctuations and Growth, Economics, Pethokoukis

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In a new note, Goldman Sachs points out that the current economic expansion — beginning in July 2009 —  is now 76 months or 6 1/3 years old. So how should one think about its lifespan on the basis of past history, rather than what’s actually happening right now?
The typical US expansion, according to the National Bureau of Economic Research, lasts just over three years with the longest (from 1991 to 2001) lasting 10 years. But as Goldman economist Zach Pandl adds, expansions since 1950 have gotten longer, now lasting around five years on average. This is true globally as well. And after examining both US and international business cycles, Pandl concludes:

Based on these historical business cycles, we can calculate the probability that an expansion will continue given a certain starting point—in the same way that one can derive survival probabilities from an actuarial table. When an expansion is just starting out, the odds that it will last more than six years — i.e. beyond the life the current US expansion — are only about 45%, based on data since 1950. However, the “mortality rate” of business cycles is fairly steady from one year to the next, with only a slight tendency to increase over time. Therefore, conditional on an expansion reaching six years of age, the odds that it can continue are still reasonably good.Again using data since 1950, we calculate that the unconditional odds that a six-year-old expansion will avoid recession for another four years—and mature into a 10-year-old expansion—are about 60%.

It’s important to stress that these figures represent unconditional probabilities—the equivalent of life expectancies without regard to physical health. That being said, we see the historical record as mildly encouraging, and the message broadly aligns with our judgmental view—we would put the odds of recession over the next year at about 10-15%. Although there are clearly some risks to the US economy—especially from developments abroad—we do not expect the expansion to expire of old age.

Again, this forecast is based on history, not analysis of current economic conditions. Think of it as a historical headwind.
But if history holds up, Democrats shouldn’t have to worry about an election year recession as happened to Jimmy Carter in 1980. (This assumes the election is a mandate of sorts on the Obama years.) But if Hillary Clinton wins — as betting markets suggest — she might not be so lucky heading into the 2020 campaign.