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Forecasting the next U.S. recession

Investors fear a sustainable shift in the low interest rate environment that provided valuable support to riskier asset valuations (equities, corporate and high yield bonds). Closely linked and equally critical is the recent rise in expectations for further tightening by the Federal Reserve throughout next year. Expectations of more rate hikes have risen sharply throughout 2019 and even rolled over into 2020. This coupled with recent empirical research that professional forecasters tend to underestimate the rise in short rates, i.e. have difficulties in forming predictions regarding monetary policy, raises the importance of the projected path in U.S. short rates, as it could prove to be an additional regime shift and, thus, an added source of market instability. During the regime shift, i.e. the transition from a low to a higher rate environment, it would not be surprising to observe higher turbulence in financial markets.   

Some analysts believe that this transition combined with the longevity of the ongoing upswing in the U.S. economy might increase the probability of, or bring about an economic recession; one needs to keep in mind that the ongoing U.S. economic expansion that started in 2009 appears poised to become the longest since the 19^th century. Yet, even as U.S. growth remains robust, expectations of rising headwinds from both fiscal and monetary policy have in return intensified investor worries regarding the risk of a recession.

More recently, it appears that there is a consensus among economists and analysts that the next U.S. recession will occur sometime during 2020. Apart from the timing, they seem to agree on the likely elements and potential causes that would lead to such a scenario.