November 18, 2018
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Don’t forget just what a recession looks like

Richard Drew | AP
Richard Drew | AP
A board above on the trading floor of the New York Stock Exchange shows the closing number for the Dow Jones industrial average, Feb. 6, 2018. The Dow gained 567 points, or 2.3 percent, recouping nearly half of the 1,175-point plunge it took the day before.

Remember recessions? Those times where the stock market goes down, unemployment goes up and businesses stop investing?

There was a really big one about a decade ago, but that was a long time ago — there are plenty of young workers now who were kids back when names like Lehman Brothers and Ben Bernanke were in the news.

According to the indicators compiled by the National Bureau of Economic Research, the U.S. economy hasn’t been in recession since June 2009 — almost nine years ago. If the economy sustains its expansion for just 14 more months, this will be the longest the country has gone without an economic downturn in recorded history, surpassing both the 1960s and 1990s booms in duration.

Why has the economy been growing uninterrupted for so long? Part of the reason is surely due to the severity of the Great Recession itself, coupled with the slowness of the subsequent recovery.

The tremendous drought of business investment left the country with a backlog of office buildings and idle factories. And the deep dip in employment meant that it took a long time to put Americans back to work. The expansion that began in mid-2009 has really just been a long, plodding climb out of a very deep hole.

But there’s another reason, too. The U.S. simply hasn’t been hit with any of the random events — what economists call shocks — that tend to tip countries into recession.

The first kind of shock, obviously, is a financial crisis. A large drop in asset prices can spark the failure, or near-failure, of banks and other financial companies, choking off lending and sending the economy grinding to a halt. Often — as macroeconomists have belatedly come to realize — a crash in asset prices is the result of a bubble, such as dot-com stocks in the late 1990s or the housing market in the mid-2000s.

So are there any bubbles on the horizon? By traditional measures like the Shiller price-to-earnings ratio, the stock market is pretty overvalued.

At best, this means the market’s expected returns in the future will be quite weak; at worst, it means a big crash is in the offing. Alan Greenspan, who was chairman of the Federal Reserve during the tech bubble, thinks it’s the latter. But everyone seems fully aware that stocks are expensive — there is no stock-buying mania on Main Street like there was in 1999, no story that “this time is different.” Without what Greenspan once called “irrational exuberance,” it’s hard to have a bubble.

Stocks are not the only place a bubble could be present — there’s always Bitcoin and other cryptocurrencies. A Bitcoin crash could wipe out hundreds of billions of dollars of global wealth. That’s small compared to past bubbles, but still potentially enough to tip the economy into recession, especially if people have borrowed to buy cryptocurrencies.

A second bubble possibility is China. Though the country survived a stock-market crash in 2015 without a recession, a real estate crash, with its associated high levels of debt, would be a much bigger deal. That’s why the Chinese government is perennially trying to manage the property market. If it fails to do so, a Chinese meltdown could spill over to the U.S. via trade or financial linkages.

Bubbles and bank failures aren’t the only kind of shock, though. Macroeconomist James Hamilton has documented how most recessions — including the most recent one — are preceded by sharp rises in the price of oil. Currently, at about $63 a barrel, the oil price is not very high. A supply disruption, such as a war, could send it soaring, but Saudi Arabia and other key producers don’t seem to be under any military threat. Meanwhile, any big price rise will cause U.S. shale-oil producers to ramp up production, which will act to limit prices. And electric cars are slowly gaining market share, which will reduce the long-term demand for oil.

A final kind of shock could come from government policy. Big interest-rate hikes are widely blamed for the U.S. recessions of the early 1980s, as the Fed struggled to beat inflation. Now, though, central bank officials are being extremely cautious about raising rates. Jerome Powell, the new Fed chairman, isn’t believed to be particularly hawkish. There is a feeling among policy makers that the economy still is in recovery from the financial crisis nine years ago. Inflation, meanwhile, remains low, and for much of the time since the recession ended has been below the Fed’s 2 percent target.

So the three best-known recession triggers — asset bubbles, oil-price spikes and interest-rate hikes — all look reasonably unlikely. And if one does come, it probably will be a fairly mild version. Economic expansions usually don’t die of old age — something needs to come along and kill them. And right now, the biggest killers don’t seem ready to strike.

Therefore, it seems the current expansion has a reasonable chance of becoming the longest in U.S. history. But don’t get too confident — recessions have an annoying tendency to strike when people least expect.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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