March 27, 2019 / 1:00 AM / 5 months ago

RPT-COLUMN-Next U.S. recession is likely to be shorter and milder: Kemp

(Repeats March 26 column with no changes. John Kemp is a Reuters market analyst. The views expressed are his own)

* Chartbook: tmsnrt.rs/2UWPz1z

By John Kemp

LONDON, March 26 (Reuters) - If armies are often studying how to fight the previous war, economists and investors are usually expecting the next recession to resemble the last slump.

The progressive inversion of the U.S. Treasury yield curve and signs of a broad deceleration in manufacturing activity and freight movements have focused investors on the possibility of another recession in 2019/2020.

But whenever it comes, the next business cycle downturn is very unlikely to resemble the wrenching depression that followed the global financial crisis in 2008 in terms of either severity or duration.

Since the end of the Second World War, recessions have generally become shorter and milder, while expansions have become longer and less frenzied.

Post-war recessions have generally been milder because of shifts in the composition of the economy, labour force and sources of personal income (“The American business cycle: continuity and change”, Zarnowitz, 1986).

Counter-cyclical fiscal and monetary policies have also dampened the business cycle and promoted greater economic stability.

In contrast, the downturn that followed the global financial crisis was much more like a pre-war economic crisis than any of its post-war predecessors (tmsnrt.rs/2UWPz1z).

U.S. manufacturing output slumped almost 21 percent between December 2007 and June 2009, more than twice the average decline of 8.4 percent during the previous 10 recessions.

And the recession lingered for 18 months, almost double the post-war average of 10 months, according to the Business Cycle Dating Committee of the National Bureau of Economic Research.

Illiquidity and insolvency in large parts of the financial system between 2007 and 2009 propagated a much worse downturn in real economic activity than any of its 10 predecessors.

The experience is seared into the collective memory, but it would be a mistake to assume the next recession will be as painful - confusing a worst-case scenario with the most likely expected outcome.

Statistically, the next recession is likely to be shorter, lasting less than a year, and milder, with economic activity, employment and incomes contracting much less.

The next recession, when it arrives, is therefore likely to have a much smaller impact on commodity consumption and prices as well as a smaller effect on other asset markets.

So far, there have been only a few signs of the excessive complacency, relaxation of credit standards, and risk-taking in the financial system that contributed to the subprime housing bubble and subsequent crash.

Credit quality is cyclical and will continue to weaken the longer the current expansion lasts, but, provided the deterioration is not too great, the next recession is unlikely to be fuelled by a financial crash on the scale of 2008.

Related columns:

- Fed wrestles with signs of a slowing economy (Reuters, March 22)

- Oil and equities prepare to party like it’s 1999 (Reuters, March 19)

- Fed’s next move more likely to be a cut in interest rates (Reuters, March 7)

- U.S. economy set to slow as fiscal stimulus fades (Reuters, Feb. 22) (Editing by Emelia Sithole-Matarise)

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