From Noah Smith at Bloomberg:
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:
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:
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 documentedhow 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: