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What this long economic expansion means for Florida's next recession

Federal Reserve Bank researchers looked at the relationship between economic expansions and the severity of subsequent recessions.
Does a long economic expansion lead to a more severe recession
Does a long economic expansion lead to a more severe recession
Published Feb. 4, 2019

The economy is bearing down on an impressive record: longest uninterrupted expansion. Come July, with any luck, it will surpass the 120-month mark set between 1991 and 2001.

The run-up since the end of Great Recession has been a slow burn, with annual gross domestic production averaging less than 2.5 percent. Most other expansions averaged more than 3 percent, but this one is making up for it with staying power.

Which raises a question: Is there a correlation between how long an economy grows and the severity of the next recession? In other words, what are we in for when the economy sours?

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Before getting to the answer, it should be said that the economy shows little sign of tanking in the short term. Unemployment remains low and inflation remains in check, at least for now. The economy likely will slow this year, but it will still expand.

One indicator of a recession is two consecutive quarters with negative growth in gross domestic product. Most experts don't think that will happen until 2020 or beyond.

But a recession will come. It always does. The so-called forest fire theory would suggest we are in for a doozy. It posits that long expansions lead to more severe recessions, a little like long spells between wildfires lead to more debris for the next fire to consume.

In this case, the fuel is less-than-optimal economic relationships. Think of it this way: With low unemployment, companies are forced to hire workers that don't fit the requirements. The longer the expansion, the higher the pile of these flawed relationships. When the economy plunges, that leaves more workers vulnerable to layoffs, which can make a recession worse.

Not buying it? Good news. Neither are researchers from the Federal Reserve Bank of Cleveland.

Senior researcher Murat Tasci and Nicholas Zevanove, a former intern at the bank, looked at the nation's nine recessions and 10 expansions since World War II and found little support for the theory. Recessions that follow long expansions were not consistently more severe than those that follow shorter expansions, they concluded in a report released last month.

For instance, the recession that followed the long dot-com expansion was one of the mildest on record. So was the recession that followed the long run-up in the 1960s.

To further test the theory, they delved into state employment data. Some states had more economic ups and downs than that nation as a whole, which provided more examples than the relatively modest number of national recessions. Still, the findings were the same.

"Contrary to the predictions of the forest fire theory, national and state level data do not provide much evidence that long expansions are followed by deeper recessions," they said.

That's not to say the next recession won't be severe. It's just that a long expansion doesn't make it more likely.

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In fact, they found more evidence for the opposite — that recessions that follow long expansions are often milder, though they warned that the relationship was weak.

And if the next recession is a bad one, the researchers found another upside: Severe downturns can lead to stronger recoveries.

Contact Graham Brink at Follow @GrahamBrink.