Author Topic: How are recessions predicted and why is there one supposedly coming up?  (Read 1674 times)

joenorm

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I am just curious about this whole recession thing, what gets people started thinking a recession is coming?

It seems to me half of it is just people talking about it, it becomes a snowball of speculation and then we actually create it ourselves out of fear. We actually manifest it.

Or are there solid metrics for why a recession may happen? How does the economy go from "booming" to recession so fast?

I know it's all pretty complicated, but I don't have the slightest idea how this could work.

thanks

terran

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #1 on: August 21, 2019, 08:42:32 AM »
I am just curious about this whole recession thing, what gets people started thinking a recession is coming?

People always think a recession is coming. Here's a good list of threads @RWD posted where people thought a recession was coming starting in 2013: https://forum.mrmoneymustache.com/investor-alley/vtsax-and-a-looming-recession/msg2441818/#msg2441818

DadJokes

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #2 on: August 21, 2019, 08:53:36 AM »
A really strong predictor is the "inverted yield curve," which has recently occurred. Here's a link to a series of Twitter posts that explains what that is: https://twitter.com/moorehn/status/1161766324642750465?s=19

Historically, such an occurrence generally signals that a recession will start within the next two years. It could be tomorrow; it could be two years from now; or there might not be a recession at all (inverted yield curve does not guarantee an incoming recession). Personally, I have job security and don't plan to retire for at least another 10-15 years, so a recession has no impact on my investing plan of 100% equities.

If I didn't have a stable job, I'd probably beef up my emergency fund, and if I was within 3-5 years of retirement, I might increase my bond allocation (regardless of recession fears).

MayDay

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #3 on: August 21, 2019, 09:31:20 AM »
Personally I've been watching the housing starts.

We very well could technically have a recession but not feel it until it is over. I think one is coming in late 19/ early 20, or that we are already on one, but I'm certainly not panicking.

Kris

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #4 on: August 21, 2019, 09:44:26 AM »
The inverted yield curve, as DadJokes says, is one of the reasons.

One reason this recession (if one is coming) might be a bit challenging is that the Fed doesn’t have a lot of wiggle room to lower interest rates. If we do into a recession, there’s not a lot that can be done to ease it.

Technically, there’s always a recession coming sooner or later. To me, it feels like one is likely to occur in the next year or two. Hopefully (probably) it won’t be as bad as the one in 2008. The measures I would take to prepare are pretty indistinguishable from what I do as a (quasi)mustachian: get/keep my spending low, make sure I have no debt, make sure I have enough liquidity to ride out any issues without having to dip into retirement funds or index funds, and consider opportunities to by at low rates a nice silver lining.

mozar

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #5 on: August 21, 2019, 09:45:11 AM »
This is a great opportunity for you to learn about the economy. I would start with "debt:the first 5000 years" and I've heard good things about Warren buffets autobiography too.
From a psychological perspective when people say a recession is looming it is because they are hoping to "time the market" which means buy at the bottom and sell at the top. People who subscribe to the MMM ideas prefer the "buy and hold" strategy because individuals do a very poor job of predicting the market.

Most people say that a recession is when GDP is negative for 2 plus quarters.  Germany had negative growth for a quarter recently.  That is something to be concerned about. But notice that people who say the recession is looming and panicking  never come with facts. They just "know."

In my opinion it's the opposite. People who are worried about a recession make it less likely to make it happen because they are less likely to do stupid shit like buy a house they can't afford.

Also be wary of people who don't want to invest because stocks are at an "all time high."

Cpa Cat

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #6 on: August 21, 2019, 09:53:44 AM »
The economy is cyclical. Any time we're not in a recession, it's a safe bet that "a recession is coming up." Historically, we generally have recessions within 10 years of the last one. So, since it's been 10 years since the last one, the talking heads are making a bet that "a recession is coming."

A recession is defined as a fall in GDP in two successive quarters. Because data is not available until later, we often don't know we've entered a recession until we're already into it. A short recession may be over before we realize we've had one.

Due to recent history, when we think "recession," our minds immediately turn to the Great Recession as a frame of reference. But remember - it's called Great for a reason. Most recessions are not as bad as that one. For example, the recession we had before that was from March 2001 to Nov 2001 and there was a -0.3% GDP decline - not exactly the stuff of nightmares.

Samuel

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #7 on: August 21, 2019, 01:26:12 PM »
"The stock market has predicted 9 of the last 5 recessions" - Paul Samuelson

Or with more data and less snark:

https://fivethirtyeight.com/features/economists-are-bad-at-predicting-recessions/

Finances_With_Purpose

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #8 on: August 21, 2019, 09:13:11 PM »
Read the WSJ for a year.  Better than an ivy-league econ degree. 

You asked a question to which the answers are incredibly complicated, and peoples' answers will vary dramatically.  The markets depend upon human nature, and humans are complex, especially human psychology. 

With that said, over time, people observe certain trends in behavior.  The past can never guarantee the future, but you're hearing about people debating based upon those past trends: yield-curve inversion, length of recovery from last recession/cycle, downward trends in prospective measures, like housing starts, commodity prices, and on and on and on and on.  Some tell us more than others, some are more accurate than others, and generally, the more that align, the more people begin feeling that we're in a recession--and that feeling, plus the behavior change--can get us there (or more deeply there). 

It's no problem that you feel like you don't understand it well; the smartest folks in these fields have centuries-long debates, don't agree at all, and actually know far less than the public believes or the papers proclaim.  And we won't even get to wisdom...

Try as we may, humans are still humans, and still behave in human ways, so even those who observe the patterns deeply disagree and always will, at least as long as we're humans. 

So, welcome to economics.  Rather than leave you with that, though, here's the most epic economics rap video you'll ever watch.
« Last Edit: August 25, 2019, 08:32:50 PM by Finances_With_Purpose »

v8rx7guy

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #9 on: August 21, 2019, 09:16:50 PM »
Were people predicting a recession in 2007/2008?  Or did it just come earlier than expected?  I know that there are some people who famously saw it coming and put their money where there mouth is, but I'm just wondering if people were talking about it as much as they are now.  I was only 1 year into my career in the oil industry so I didn't even really notice the great recession (a time of high oil prices and lots of money being thrown around).

mozar

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #10 on: August 22, 2019, 07:19:35 AM »
People were absolutely not talking about a recession in 2007. I remember I was looking for a job in fall of 2007 and end it was if the tide had gone out. There was only 3 jobs available to apply to where a few months earlier there had been hundreds. Nobody believed me. At that time people were talking about how housing was going to increase by 10 to 30 percent per year forever. My dad got a huge offer on his house and turned it down because he believed he could do better. He ended up losing the house to foreclosure a couple years later. I don't remember any lay people talking about a recession until Lehman brothers collapsed in summer 08.

norajean

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #11 on: August 22, 2019, 07:31:23 AM »
The inverted yield curve is a reflection of investor sentiment.  If investors are fearful, for whatever reason, they will jump into bonds and the yield curve can invert.

People are fearful now because of a looming trade war, mostly with China.  Otherwise, economic indicators are strong.

Imma

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #12 on: August 22, 2019, 07:36:18 AM »
Were people predicting a recession in 2007/2008?  Or did it just come earlier than expected?  I know that there are some people who famously saw it coming and put their money where there mouth is, but I'm just wondering if people were talking about it as much as they are now.  I was only 1 year into my career in the oil industry so I didn't even really notice the great recession (a time of high oil prices and lots of money being thrown around).

I was in my last year of highschool from Sept 2007 to May 2008. My economics teacher kept going on about the upcoming recession, about Ninja loans, collapsing banks and how the eurozone would be in serious trouble soon when the recession hit.

Everyone thought he was a conspiracy nutter, banks don't collapse. Until they suddenly started doing so, from August in the US and a month later in our country.

nereo

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #13 on: August 22, 2019, 07:48:42 AM »
The inverted yield curve is a reflection of investor sentiment.  If investors are fearful, for whatever reason, they will jump into bonds and the yield curve can invert.

People are fearful now because of a looming trade war, mostly with China. Otherwise, economic indicators are strong.

...well, it depends on *which* economic indicators you are looking at, and how much weight you apply to those particular indicators. On the "economy is strong" side there are things like low unemployment, rising (but volatile) stock market, (slowly) rising wages, a high number of building permits and low inflation (CPI).  On the "worrisome" side there's slowing GDP, falling consumer confidence, a number of large countries with negative growth (e.g. Germany), historically high consumer debt-to-income levels, a drop in manufacturing and trade tensions.
Plus a bunch of other less conventional indicators. 

StarBright

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #14 on: August 22, 2019, 08:17:17 AM »
People were absolutely not talking about a recession in 2007. I remember I was looking for a job in fall of 2007 and end it was if the tide had gone out. There was only 3 jobs available to apply to where a few months earlier there had been hundreds. Nobody believed me. At that time people were talking about how housing was going to increase by 10 to 30 percent per year forever. My dad got a huge offer on his house and turned it down because he believed he could do better. He ended up losing the house to foreclosure a couple years later. I don't remember any lay people talking about a recession until Lehman brothers collapsed in summer 08.

I think some people were talking about it. I remember watching a video on the freakonomics blog back in 2007 or so that plotted the historical housing index into a roller coaster video. It was certainly clear that what we were experiencing had no historical precedent. I was a baby and in my first job. That video stuck with me.

Now - were people talking about how subprime markets could take out the whole economy? Not that I could tell, but people were certainly starting to warn  about "irrational exuberance."

LaineyAZ

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #15 on: August 22, 2019, 08:44:16 AM »
The inverted yield curve is a reflection of investor sentiment.  If investors are fearful, for whatever reason, they will jump into bonds and the yield curve can invert.

People are fearful now because of a looming trade war, mostly with China. Otherwise, economic indicators are strong.

...well, ….
Plus a bunch of other less conventional indicators.

On the less conventional side, I have a sibling who worked public events at stadiums and other areas.  In the 2008 Great Recession, his first indicator was people suddenly buying much less beer, snacks, etc. and a big drop in tipping.
So maybe check with your local friendly waitperson or stadium vendor and find out what they're experiencing on the job these days?

bacchi

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #16 on: August 22, 2019, 09:35:43 AM »
People were absolutely not talking about a recession in 2007. I remember I was looking for a job in fall of 2007 and end it was if the tide had gone out. There was only 3 jobs available to apply to where a few months earlier there had been hundreds. Nobody believed me. At that time people were talking about how housing was going to increase by 10 to 30 percent per year forever. My dad got a huge offer on his house and turned it down because he believed he could do better. He ended up losing the house to foreclosure a couple years later. I don't remember any lay people talking about a recession until Lehman brothers collapsed in summer 08.

I think some people were talking about it. I remember watching a video on the freakonomics blog back in 2007 or so that plotted the historical housing index into a roller coaster video. It was certainly clear that what we were experiencing had no historical precedent. I was a baby and in my first job. That video stuck with me.

Now - were people talking about how subprime markets could take out the whole economy? Not that I could tell, but people were certainly starting to warn  about "irrational exuberance."

Right. Shiller was broadcasting it loudly and it was pretty obvious -- people were getting rich selling their houses to other people who were getting rich selling their houses to other people who were....

As seen in the movie "The Big Short," only a few people had the knowledge that CDOs were going to truly ruin us and only a few of those people believed it. But it was obvious that housing was in a bubble.

Cpa Cat

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #17 on: August 22, 2019, 11:38:10 AM »
People were absolutely not talking about a recession in 2007. I remember I was looking for a job in fall of 2007 and end it was if the tide had gone out. There was only 3 jobs available to apply to where a few months earlier there had been hundreds. Nobody believed me. At that time people were talking about how housing was going to increase by 10 to 30 percent per year forever. My dad got a huge offer on his house and turned it down because he believed he could do better. He ended up losing the house to foreclosure a couple years later. I don't remember any lay people talking about a recession until Lehman brothers collapsed in summer 08.

I think some people were talking about it. I remember watching a video on the freakonomics blog back in 2007 or so that plotted the historical housing index into a roller coaster video. It was certainly clear that what we were experiencing had no historical precedent. I was a baby and in my first job. That video stuck with me.

Now - were people talking about how subprime markets could take out the whole economy? Not that I could tell, but people were certainly starting to warn  about "irrational exuberance."

I recall that the Economist was also publishing opinion pieces about the housing bubble prior to the recession. But I don't recall reading too much about the derivatives market or subprime mortgage market, or that banks were doing to implode, or the auto industry. That recession didn't happen just because of the housing bubble. Let's not forget that a large portion of Europe also hit a recession for their own reasons.

The problem with that is that hindsight is 20/20. Some economists were correct in their predictions. But there were a LOT of opposing opinions at the time saying they were wrong. It's easy now to look back and say - Hey - this person and this person were talking about a recession, and they got a trigger correct. We've forgotten all of the people who said how awesome things were. You could likely find someone who was warning about every single recession trigger prior to that recession. But no one was putting all those puzzle pieces together until we were already in it.

There are always people predicting recessions. More often than not, they are incorrect about triggers.
« Last Edit: August 22, 2019, 11:45:26 AM by Cpa Cat »

StarBright

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #18 on: August 22, 2019, 12:22:12 PM »
People were absolutely not talking about a recession in 2007. I remember I was looking for a job in fall of 2007 and end it was if the tide had gone out. There was only 3 jobs available to apply to where a few months earlier there had been hundreds. Nobody believed me. At that time people were talking about how housing was going to increase by 10 to 30 percent per year forever. My dad got a huge offer on his house and turned it down because he believed he could do better. He ended up losing the house to foreclosure a couple years later. I don't remember any lay people talking about a recession until Lehman brothers collapsed in summer 08.

I think some people were talking about it. I remember watching a video on the freakonomics blog back in 2007 or so that plotted the historical housing index into a roller coaster video. It was certainly clear that what we were experiencing had no historical precedent. I was a baby and in my first job. That video stuck with me.

Now - were people talking about how subprime markets could take out the whole economy? Not that I could tell, but people were certainly starting to warn  about "irrational exuberance."

I recall that the Economist was also publishing opinion pieces about the housing bubble prior to the recession. But I don't recall reading too much about the derivatives market or subprime mortgage market, or that banks were doing to implode, or the auto industry. That recession didn't happen just because of the housing bubble. Let's not forget that a large portion of Europe also hit a recession for their own reasons.

The problem with that is that hindsight is 20/20. Some economists were correct in their predictions. But there were a LOT of opposing opinions at the time saying they were wrong. It's easy now to look back and say - Hey - this person and this person were talking about a recession, and they got a trigger correct. We've forgotten all of the people who said how awesome things were. You could likely find someone who was warning about every single recession trigger prior to that recession. But no one was putting all those puzzle pieces together until we were already in it.

There are always people predicting recessions. More often than not, they are incorrect about triggers.

I agree that not everyone was putting everything together - and certainly not at the level to sound alarms on a great recession. But also, just one bubble would have been enough to create a run of the mill recession. I'm pretty sure the Economist was even talking about subprimes back at the end of 2006 and various publications were definitely starting to make noise about ARMs resetting.

My post was more to point out that red flags exist and when you are in ahistorical situations or are seeing historically relevant red flags, it is worth paying attention. They don't guarantee a recession coming, and past doesn't necessarily predict future, but some things do tell us to sit up and pay attention. Also, if it is too good to be true, it probably isn't true :)


Tass

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #19 on: August 22, 2019, 02:18:32 PM »
Quick comment on the yield curve and recessions: historically,  the best predictor of recessions is an inversion of the 2 year and 10 year yields (which, to my knowledge, has not happened yet this cycle). Early Retirement Now had an article a while back on this topic:

https://earlyretirementnow.com/2019/04/03/yield-curve-inversion-why-i-am-not-worried-yet/

Er, that has happened since April. There's even an update at the top of the blog post.

However, I enjoyed this article yesterday about how bad economists are at predicting recessions: https://fivethirtyeight.com/features/economists-are-bad-at-predicting-recessions/

diapasoun

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Re: How are recessions predicted and why is there one supposedly coming up?
« Reply #20 on: August 22, 2019, 02:42:11 PM »
A really strong predictor is the "inverted yield curve," which has recently occurred. Here's a link to a series of Twitter posts that explains what that is: https://twitter.com/moorehn/status/1161766324642750465?s=19

Hey, this link was REALLY helpful. Thank you. I've read other things on it, but they weren't nearly as effective at conveying the human behavior around inverted yield curves.