The odds of a recession between now and 2023 are between 15 percent and 20 percent, according to Bob Browne, chief investment officer of Northern Trust.
While few investment management firms see a recession in the next year, Northern Trust is going out on a limb as it publishes its five-year Capital Market Assumptions outlook. No recession would mean the current economic expansion, which began in 2009, would last at least 14 years, making it by far the longest on record.
Many economists and money managers believe the U.S. economy has exited the New Normal period of very low inflation and below average growth that existed for most the 2009-2017 period. At the same time, there have been a number of predictions in recent weeks that a recession is likely to occur in 2020 or 2021, though the causes they cite center on vague probabilities of a Federal Reserve blunder. A few observers like Gavekal Capital's Anatole Kaletsky have rised the possibility that this expansion could turn into a really long one, if not a strong one.
Browne believes the business cycle will remain subdued with modest growth over the next five years for several reasons. Chief among the factors holding down growth are the demographics of an aging population, and regulatory stabilizers in the banking sector that won’t permit excessive leverage to build up. Elevated public-sector debt levels in developed nations around the world prompting central banks to remain cautious about making the very policy errors that many bears believe are inevitable.
Cash is likely to be the worst performing asset in what Northern Trust calls a "stuckflation" world. Over the next five years, the trust company's asset management team doesn't expect 10-year Treasury yields to exceed 3.5 percent and they are likely to be lower in 2023 than they are today, when the 10-year pieced the 3.0 percent level.
Not only do Browne and his team expect the next downturn to occur in the distant future; they also expect it to be relatively mild. One reason for rising expansion longevity is the growing importance of the service sector that “smooths out’ peaks and valleys in overall GDP.
Browne is hardly saying that the next five years will be a cakewalk. In an $18.5 trillion economy, there are dozens of “micro-economies,” and more than a few could experience their own self-contained recessions, as energy did in 2015 and 2016.
“Time is turning out to be a key variable,” Browne explains. “We need more time to achieve absolute growth in magnitude of GDP.”
Few except President Trump and his economic advisor Larry Kudlow believe the U.S. economy can sustain a 3.8 percent growth rate. But let’s just assume it did. If GDP grew at 3.8 percent for the next five years, that would translate into a 70 percent expansion of GDP from June, 2009 to September 2023, a period of more than 14 years.
That would still fall short in absolute magnitude of the other extended recoveries that began in November 1982 and March 1991. In fact, the eight-year expansion that started in November 1982 produced a 75 percent increase, while the 1991-2000 recovery produced a 74 percent increase in total output.