Economics: Are Recessions Inevitable?

 

(Drivebycuriosity) -  There is a lot talk about recessions lately. Many claim that recessions are inevitable. Are they? Last summer Australia’s economy entered its 27th year without a recession (reuters ). Downunder`s economy broke a record held by The Netherlands, which didn`t have a recession between 1982 and 2008.

In most countries a recession is defined as 2 back-to-back negative gross domestic product (GDP) quarters. The US goes her own way, as usual. Here a board, the National Bureau of Economic Research (NBER), decides when a recession starts and when it ends. They focus on economic indicators such as real income, employment, industrial production and retail sales. As a result the 1960-1961 and the 2001 recessions did not have back-to-back negative GDP quarters (schwab).

Many recession callers remind us that the current economic expansion is already 10 years old and they claim that we are late in the business cycle. Some industries had a cyclical history indeed, like steel, computer chips, cars, with boom phases and overinvestment which led into bust periods, but manufacturing lost importance. 

Today the economy in the US and other Western countries is dominated by the service sector. Services contribute about 80% to the US economy and are still growing faster than manufacturing. Service industries like health care are much more stable than manufacturing (people need to visit their dentists regularly) so the whole economy is getting more stable over time.

"Economic expansions don´t die of old age", said Janet Yellen 2015 as she was still chairwoman of the Federal Reserve ( stlouisfed ). Yellen - and many other economists - believe that the expansion has to be murdered, that there must be an event which causes a recession. These events exists indeed.  

Nine out of ten of the U.S. recessions since World War II were preceded by a spike up in oil prices, wrote Prof. James D. Hamilton, University of California, San Diego ( pdf econweb). Another study by Prof.  Hamilton shows that the oil price shock from 2007/2008 - when oil prices spiked from about $50 to $147 - turned the economic slowdown into a severe recession (econbrowser).: "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives). Fortunately the risk of extreme oil price jumps - like in the years 1990 & 2007/08  (chart below) - are low thanks to the rising US oil production which reduced the dependence from OPEC and other unreliable oil producers significantly (driveby  ).

Since World War II recessions were also often caused by the Federal Reserve who responded too late to rising inflation rates (wikipedia). Then the Fed needed sharp interest rate hikes in order to break the inflation mentality. This risk is also very low. The Fed already hiked her interest rates 8-times since the last recession and there are no signs of accelerating inflation. Inflation rates will be constrained because oil prices are getting tamed by the rising US oil production. Other prices are curbed by the Internet, automation & other aspects of the technological progress which are reducing the costs of producing & distributing stuff and therefore curbing inflation (Amazon effect).

 

Btw The expansion (recovery) since the 2008/09 recession is slower than usual (chart above  scottgrannis). The US GDP is below the long term trend, which is defined by population growth and how productive those people are. There are no signs of overheating & overshooting, there is no bubbling economy, quite the opposite.

I am aware that a freak event could happen which could cause a recession but the probabilities for those incidents are low and so is the likelihood of a recession.

To be continued