It is hard to disagree with theories on economic cycles – as economies do obviously move between periods of strong growth, and periods of weak growth or contraction. There is plenty of disagreement with the frequency of economic cycles, which is complicated by the fact that there are likely multiple different cycles, with theories such as the Juglar cycle (7-11 years), Kuznet’s swing (15-25 years), and Kondratiev waves (45-60 years) all enjoying varying levels of evidence and support.
Looking at data from the National Bureau of Economic Research (NBER, an American economic research organisation), there have been seven US recessions in 50 years since 1969, which implies a frequency of recession of around 7-8 years.
Each of those recessions has been foreshadowed by an inversion of the US treasury yield curve – which means that shorter dated treasury bonds are trading at higher interest rates than longer dated treasury bonds. According to the NBER every time the 3-month treasury bond has traded at a higher interest rate than the 10-year treasury bond, the economy has experienced a recession soon after; the average time from the NBER inversion to the start of a recession is 12 months.
It is now over 10-years since the start of the “Great Recession” of 2008-2009, and it could be argued that we are now overdue another US economic recession – which would no doubt also see an economic downturn around the rest of the world.
On Friday we saw the yield on US 3-month treasuries rise above the 10-year treasuries for the first time since 2007, whilst this is seen as an indicator that global growth is about to turn for the worst – it is worth noting that the Australian market actually reached its all time high two-months after that 2006-2007 inversion in November 2007.
The longest period of growth in the US occurred between their 1991 recession and the 2001 recession – a period of 10 years to the month. The great recession of 2008-2009 ended in June 2009, and it is likely that US economic growth will remain positive until June – which will make the current period of growth the longest in US history. This growth period has been supported by low interest rates around the world, but it leaves central banks very little room to lower interest rates if another recession scenario is seen.
Some are arguing that this time around is different for the US economy; with some economic indicators not at recessionary or pre-recessionary levels. They point to the strong labour market, with low unemployment and high wage growth as likely to support consumption – a key driver of economic growth, as well as rising business investment and higher government spending. Additionally, other segments of the bond market, such as corporate bonds, are not indicating a recession.
According to Mohamed A. El-Erian, the chief economic adviser at Allianz SE, “the latest curve inversion could prove to be an exception to the rule — unless a misreading creates a detrimental self-fulfilling prophecy.”