The year-end volatility in U.S. stocks has erased all of 2018’s stock market gains, causing investors to worry about what to expect in 2019. Rising interest rates coupled with an international trade war and uncertainty in Washington has some investors concerned that the 10-year-old bull market may finally be coming to an end. Bank of America economist Michelle Meyer recently compiled a list of frequently asked questions and answers related to a future economic slowdown. Here are nine questions investors should be asking when trying to identify signs of the next recession.
Has the recovery lasted too long?
It’s been roughly a decade since the Great Recession, but Meyer says the recovery’s duration may be deceptive. The post-recession recovery has lasted 113 months, making it the second-longest in history. If the economy continues to grow, it will set a record in July 2019. However, real average annual GDP growth during the recovery has been just 2.3 percent compared to 2.9 percent in the previous recovery and 3.6 in the expansion period before that. One reason for the slow growth has been declining government spending, which accounts for around 20 percent of GDP.
What are the recession models predicting?
An economic model by the Federal Reserve Bank of St. Louis incorporates U.S. nonfarm payrolls, industrial production, real personal income and real manufacturing and trade sales. The St. Louis Fed model currently suggests there is only a 0.24 percent chance of an imminent U.S. recession. Bank of America’s predictive recession probability model relies on the spread between three-month Treasury bill rates and 20-year Treasury note rates. The model currently suggests there is a 26 percent chance of a recession within the next year. That probability remains relatively low, but it’s up 4 percent in the past month.
What Is big data saying about the economic cycle?
Bank of America recently applied a machine learning algorithm to more than 100 economic variables dating back 50 years to gain insights into the current economic cycle. The algorithm determined the current cycle is unique and used the data to sort through the past 50 years of economic cycles. It sorted the cycles into three stages – boom, soft patch and recession. Each of the seven U.S. recessions of the past 50 years has…
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