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External Partners Alumni Search Submit Return to home Search Search About About Olin Home Why Olin Equity, Diversity & Inclusion Leadership & Strategy News & Media Events Contact Us Programs Programs Home Explore Our Programs BS in Business Administration MBAs Specialized Master's Doctoral Executive Education Dual Degrees Faculty & Research Faculty & Research Home Faculty Directory Research Research Centers Olin Brookings Commission Olin Award Student Resources Student Resources Home Career Services Center for Experiential Learning Entrepreneurship Academic Calendars Student Organizations For Current Students For Military Veterans Admissions Admissions Home Scholarships & Aid Attend Program Events Visit Olin Ask a Student Student Profiles Request Information Refer a Candidate External Partners Alumni WashU Expert: Recessions, like earthquakes, are impossible to predict confidently January 2, 2020 By Jill Young Miller 3 minute read Home News WashU Expert: Recessions, like earthquakes, are impossible to predict confidently Some economic observers continue to warn about signs of a potential U.S. recession.  Glenn MacDonald, John M. Olin Distinguished Professor of Economics and Strategy at the Olin Business School at Washington University in St. Louis, says many signs aren&＃8217;t particularly reliable &＃8212; but do keep an eye on housing starts. MacDonald sat down to discuss signs of a recession and whether he foresees one anytime soon. He doesn&＃8217;t, but he cautions that history shows it&＃8217;s not a question of&＃160;if&＃160;but&＃160;when. Where do recessions come from? Much like earthquakes, we know a great deal about business cycles, but we don&＃8217;t really know how to predict their arrival. Sometimes we can tell ourselves a story after the fact. But we don&＃8217;t know whether those stories are correct. People might blame the previous recession on the financial crisis? The weakening housing market in 2006 precipitated the financial crisis; GDP growth was already shrinking when the housing market weakened. It&＃8217;s not that the financial crisis caused the weakening housing market. It&＃8217;s the other way around. MacDonald There are plenty of candidates for the cause of the most recent recession, including the high and rising level of government debt. But economics isn&＃8217;t like physics, where there are certain rules that apply because, for example, the speed of light is a certain number. However, empirically, around the world, when government debt reaches something like a whole year&＃8217;s GDP &＃8212; that&＃8217;s a noteworthy point. And the U.S. was getting there at that time, which many saw as a great cause for concern. The debt-GDP ratio has remained high, and, so far, the more frightening scenarios have not transpired. One thing thought to predict recessions is an&＃160;inverted yield curve, like occurred earlier this year, right? Statistically there is a correlation between yield curve inversions and eventual onset of recessions. However, the connection between them is quite loose and difficult to employ to predict recessions confidently. For example, the yield curve was inverted for much of 2019 &＃8212; suggesting a recession might be coming. But it is no longer inverted &＃8212; suggesting the opposite. When you see housing starts tailing off, that does tend to be a sign of trouble. &＃160; Glenn MacDonald And the reason for that is simply that the trouble has already started, as in 2006. So you are not really predicting a recession as much as noticing it early. How are housing starts doing? They were really, really strong in September. They&＃8217;re not going as fast as they were going. But they&＃8217;re still going. We&＃8217;re experiencing a long expansion. Should we be worried? In a business cycle, proceeding from a trough to a peak is an &＃8220;expansion.&＃8221; On average in the postwar, US expansions been about five years long. So when people look at this 10-year expansion that we&＃8217;ve just completed, they think it&＃8217;s really long. But there is a lot of variability in expansion length. For example, the expansion that started right around 1990 also lasted 10 years. Recognizing this variability in expansion length, the data suggest that the bulk of expansions would be less than 10 years in duration. So if you said, &＃8220;It&＃8217;s kind of like we&＃8217;re almost overdue for a recession,&＃8221; that would be consistent with the facts. But that idea is based on just 11 recessions and an economy that has changed drastically since the post war, so making confident predictions about such a rare event is impossible. About the Author Jill Young Miller As research translator for WashU Olin Business School, my job is to highlight professors’ research by “translating” their work into stories. Before coming to Olin, I was a communications specialist at WashU’s Brown School. My background is mostly in newspapers including as a journalist for Missouri Lawyers Media, the Atlanta Journal-Constitution, The Washington Post and the Sun-Sentinel in South Florida. Contact Us For assistance in finding faculty experts, please contact Washington University Public Affairs. Monday&＃8211;Friday, 8:30 to 5 p.m. Sara Savat, Senior News Director, Business and Social [email protected] &＃160; Kurt Greenbaum,Communications [email protected] Twitter: WUSTLnews Share article Apply Now Visit Us Request Info One Brookings Drive, St. Louis, MO 63130-4899 [email protected] 314-935-7301 News & Media Events Faculty Directory WashU Center for Career Engagement Washington University home Olin Links Sitemap Privacy Policies Title IX Accessibility ©2024 Washington University in St. Louis