This is Carl Tannenbaum, Chief Economist for Northern Trust. I'm not sure why, but people are often unwilling to use the word "recession." At one point, the chairman of the President's Council of Economic Advisors wanted to avoid using the term, and instead substituted the word "banana" during a speech that he gave, which was almost ridiculous. And even Fed officials, more recently, have decided to use the term "R-word," instead of referring to a downturn in the economy. But I'm going to tackle this head-on for us today.
Recessions, while unpleasant, are a natural part of a business cycle. In the United States they occur, on average, once every five years, and for the most part, recessions are short. Clients have asked me, what is a recession? And I usually respond first by joking that a recession is when you're out of work, and a depression is when I'm out of work.
What causes recessions? Well, it's usually not the age of an expansion. Something usually acts on the economy to bring it to a halt, and that something is usually a policy mistake. Maybe a central bank raises interest rates to too high a level, or there's a trade policy mistake that causes the economy to contract and those sorts of things. So the risk of recession is usually tied to the risk that a policymaker will make that kind of mistake.
How do you get out of a recession? Well, typically central banks will lower interest rates and do other things. And governments will try and spend a little bit of additional money to replace flagging private demand. The problem that we may have this time around is that neither central banks around the world, nor their governments, have a lot of room to prepare that kind of stimulus. So many of us are a little bit worried because if and when we do get to a new recession, that the ability of policymakers to draw us up out of it may be more limited.
But of course, people want to know the bottom line-- when will the next recession take place? I'll go way out on limb and say, it will take place someday, but just don't ask me what day that is. And that's The View From Here.