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BOHANON & CUROTT: Don’t fall for the idea a recession is ‘overdue’

January 11, 2019

Economic Analysis by Cecil Bohanon & Nick CurottThe current economic expansion has lasted a whopping nine years and six months, making it the second longest in U.S. history. If it continues just another four months it will be the longest expansion on record. Does that mean we are due for another recession? In a word: no.

The claim that a recession is more likely in 2019 because there hasn’t been one in a while is an example of the gambler’s fallacy. Simply put, the gambler’s fallacy is the mistaken belief that, in a game of pure chance, if an outcome occurs less frequently than normal during a given period, it will occur more frequently in the future. For example, imagine you are betting on a series of coin flips, and the coin came up “heads” the last three times. If on the next flip, you bet “tails”—thinking it’s “overdue”—you are falling into the gambler’s fallacy. On any coin toss, the odds of heads or tails are 50-50. The outcome of previous tosses doesn’t matter.

Economic research shows that the length of an economic expansion is uncorrelated with the likelihood of a future recession. Economic expansions don’t die of old age. They have to be killed by specific events that hurt the economy. These events can be spaced out or clustered together. From 1970 to 1983, there were four large recessions caused mainly by OPEC oil shocks. Yet from 1983 to 2005, the era called the Great Moderation, there were only two small recessions. Then in 2008, we experienced the Great Recession because of the mortgage meltdown.

The very term “business cycle” is misleading because it gives the impression that market economies are prone to predictable booms and busts. A better term is “economic fluctuations,” which is more descriptive of how the economy is buffeted about at different times by various shocks.

With this in mind, is it possible there will be a recession in 2019? Of course. The trade war could intensify, financial turmoil might escalate in emerging nations, the Federal Reserve might bungle monetary policy, or some other altogether unseen problem might develop. But the idea that a recession is “due” is pure hokum.

Another recession will happen eventually because something bad will eventually happen. Truth is, nobody knows when the next recession is coming. And if anybody did, she wouldn’t tell anyone; she’d keep it to herself and make a fortune investing in financial markets.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

 

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