According to a new research study comprised of analysts from the MIT Sloan School of Management and State Street Associates, there is a 70% chance that a recession will hit the U.S. economy within the next six months.
The research team came to this result through their designed index that is comprised of four market factors--industrial production, nonfarm payrolls, stock market returns and the slope of the yield curve--and a measurement called the Mahalanobis distance--a measurement that was initially used to analyze human skulls, but is now used to study standard deviations---to determine how current market conditions compare to prior recessions.
"This index offers a precise probability of recession or robust growth...by comparing key variables to the patterns that prevailed during historical episodes," the study's co-author William Kinlaq, senior managing director at State Street Associates, stated.
Using data since 1916, the index has been found to be a reliable recession indictor. The index rises leading up to every prior economic recession, with researchers noting that every time the index increased above 70% the likelihood of a recession in the following six months rose 70%.
November 2019 had a reading of 76%, so, if the index is infallible, the U.S. can expect a recession any time before May 2020.
Understanding Recession
The term recession usually causes a lot of fear and uncertainty. The fact is, recessions and even depressions are a natural part of an economic cycle. Recession periods to an economy are usually defined as two or more consecutive quarters of negative growth. A country's economic growth is measured using real gross domestic product (GDP). Other studies on recessions, including those from the National Bureau of Economic Research, include other growth affecting factors like employment levels, real incomes, retail sales and industrial output.
Recessions usually occur in two ways: sudden economic shocks or the economy's own cyclical nature. Economic shocks can be outside factors like war or decline in the supply of key goods and trade. Inside factors that can lead an economy towards recession can come from a first healthy economy that expanded into oversupply of goods. That oversupply often puts pressure on profits, which leads to layoffs, then consumers spend less due to financial insecurity, which in the end results in a recession.
Recessions are the more mild form of economic depression, which occurs when multiple recession causing factors affect an economy at the same time. The two can bring many negative effects to a once growing economy, including unemployment, market fear, slower earnings, negative outlooks for companies, sinking home values, and diminishing consumer sentiment.
Wait Theres Hope
Despite the major negatives that come with economic downturns, these effects can build a stronger economy once growth returns. Recessions help weed out the underperforming businesses and leads to more productive companies. They also help balance growth, for unstable economic advances can lead to high inflation rates that hurt consumers and cause further decline. Recessions also create more buying opportunities for investment into productive companies and changes the consumers attitudes, leading to a higher national savings which bring more investments into the economy.
