from the St Louis Fed
— this post authored by David Andolfatto
The U.S. economy has been expanding for the last eight and a half years, but how much longer will that expansion last?
- On the one hand, economic conditions show few signs of slowing down.
- On the other hand, economists have found evidence of “positive duration dependence,” which says that the longer an economic expansion goes on, the more likely it is to end soon.
Hence, there is a concern that, even though the economy looks good right now, the next recession may be lurking just around the corner.
Unemployment Rate as a Signal
The unemployment rate, shown in the figure below, reflects the current state of the business cycle. On the surface, the economy is performing well, with few signs of slowing down. As of January, the unemployment rate was just 4.1 percent, as low as it has been in nearly two decades.
Does the current low unemployment rate imply that a recession is imminent? In the past, the unemployment rate has always hit a low point just before a recession. For example:
- In 1953, it reached as low as 2.5 percent before the economy began to contract.
- Prior to the Great Recession from 2007 to 2009, the unemployment rate fell to 4.4 percent.
Unemployment Rates and Economic Expansions
In U.S. economic history, it seems the longer an economic expansion continues, the lower the unemployment rate becomes. Thus, if a long economic expansion increases the likelihood of a recession, as the idea of positive duration dependence suggests, then a low unemployment rate may indeed suggest the increased likelihood of recession.
That said, positive duration dependence is one of many factors affecting the business cycle. In a 2010 study, economist Vitor Castro concluded that, while there is evidence for positive duration dependence, several other variables also play a major role in determining the business cycle.1
Countries Experiencing Long Economic Expansions
Even though positive duration dependence suggests that the U.S. may be heading toward a recession, other economic determinants may cause the expansion to continue unabated. In a more recent paper, Castro found that the evidence for positive duration dependence dissipates after 10 years of expansion.2
That result helps explain why some of the world’s developed economies have undergone long expansionary periods. For example:
- Australia hasn’t experienced a recession since the early 1990s.
- Japan didn’t have one from 1975 until 1992.
- Canada didn’t experience one from 1992 to 2007.
If the U.S. expansion continues, positive duration dependence may not play too large a role in the coming years.
So far, the current economic expansion is the third-longest in the U.S. since World War II. The concept of positive duration dependence does suggest that the U.S. economy has become more likely to contract soon, but it’s not a guarantee. It is entirely possible that the U.S. economy will continue to expand for the foreseeable future.
Notes and References
1 Castro, Vitor. “The duration of economic expansions and recessions: More than duration dependence.” Journal of Macroeconomics, March 2010, Vol. 32 No. 1, pp. 347-365.
2 Castro, Vitor. “The duration of business cycle expansions and contractions: are there change-points in duration dependence?” Empirical Economics, April 2013, Vol. 44, No. 2, pp. 511-544.
Additional Resources
- On the Economy: Household Spending Remains Key to U.S. Economic Growth
- On the Economy: Does Government Spending Stimulate the Economy?
- On the Economy: Is Record High Consumer Debt a Boon or Bane?
Source
https://www.stlouisfed.org/on-the-economy/2018/february/us-due-recession
Disclaimer
Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.
