How close is the next US recession?

Added 2nd June 2016

Things may look good right now, but they could deteriorate quickly.

How close is the next US recession?

It’s now eight years since the last US recession in 2008, triggered by the US subprime mortgage crisis of 2007-2009 and which spread into the global "Great Recession”. And, there are concerns that another one might be on its way.

James Carrick, economist at asset manager Legal & General Investment Management (LGIM), has raised a “yellow card” warning of a coming US recession. He has identified a number of late cycle indicators – including tightening credit conditions and peaking corporate profits. In the run-up to the previous recession, as the contraction spread from the US to Britain, LGIM said its recession predictor was indeed "flashing red", with a 95% risk of recession in the UK.

Looking ahead to 2017, there are signs that inflation could pick up which could create a dilemma for the Fed going forward. Falling profits, rising inflation and tighter lending conditions would eventually drag growth back and could result in the next US recession, noted LGIM. And when it happens, it does so quickly.

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"We cannot say for sure, but a recession is on the radar in the next few years. Once there's a bit of turbulence, it's self-enforcing -it's a snow ball effect," said Carrick. 

So just how close are we to the next leg of the cycle? And, with interest rates as low as they are now, what other policy measures are there to use to get out of it?

The US economy has been picking up steadily since 2009 and its short term outlook appears reasonably bright. But the profit cycle has likely peaked.

According to Carrick, current information points to continued strong growth to Q1 2017. But lead indicators for credit conditions point to a deteriorating credit cycle - meaning a US recession could arrive in 2018. 

"Our lead indicator points to stronger growth through the rest of 2016, as government spending accelerates and the drag from weaker capital expenditure in the energy sector fades," said Carrick.

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