from the Dallas Fed
— this post authored by Anton Cheremukhin
A “profits recession” often predicts a real recession. A view of recessions as gluts of competition explains why this time a real recession is not imminent.
Gross domestic product (GDP) growth slowed considerably during the first half of 2016. Wages have increased faster than inflation since 2014, cutting into firms’ profit margins. Following dismal earnings through mid-2016, some market participants spoke about a “profits recession.”
These developments prompt a natural question: When is the next real recession coming? Economists remain far from a consensus on what causes recessions, but there is general belief in a model in which recessions are caused by large exogenous shocks that by their nature are unpredictable.
There is, however, an alternative paradigm that views recessions as coordination failures among firms trying to time their contraction or exit from the market. This interpretation of recessions as gluts of competition allows analysis of the economy’s current state and evaluation of how fragile the economy is.
The recent path of economic variables viewed through this depiction of business cycles sheds new light on the factors that may have been at play recently and how they will shape the next downturn. An interpretation of the data implies that a recession is likely within the next two to three years; a downturn, however, is not imminent.
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Source: https://www.dallasfed.org/research/eclett/2017/el1701
