Economics
The nature of the next recession
What will the next US recession look like? UBS Research investigates if a coming recession could look like those from 1990 or 2001.
The two most comparable examples are the 1990-1991 and 2001 recessions
We are not forecasting a recession for the US in the next year and a half, but we are getting questions about what it might look like. We review a few of the common threads of the two episodes we would guess are the most comparable for what might unfold should the economy undergo a recession. Both recessions lasted 8 months. Both saw similar increases in the unemployment rate. Every recession is different, but we would argue these two recessions, both reflecting the modern service-oriented US economy, represent the best baseline for considering what might unfold in terms of the amplitude and dynamics of the key economic variables.
It's hard to move the unemployment rate higher
In each of these recessions, in the first six months of the contraction the unemployment rate rose 0.9 pp and 0.7 pp, respectively. That may not sound like a lot, but that came with 700K and 1.3 million jobs lost in those six months. Given our higher level of the labor force, lower population growth and aging, the same unemployment rate increases in the next recession will likely require more job loss. We would expect comparable unemployment rate increases to require over 1 million jobs lost in the first six months of the recession, or a pace well over 2 million jobs annualized.
The FOMC would likely take the funds rate back to zero
If the National Bureau of Economic Research (NBER) calls the peak in December and contraction begins January 2023, the Federal Open Market Committee (FOMC) would likely be headed into the July 2023 meeting with job losses running over a 2 million annualized pace for the previous six months, if this history is any guide. The recession is likely to be disinflationary too. We can debate how low inflation needs to be, or whether the FOMC hesitates, but under these conditions we would expect the target range for the federal funds rate returns to the zero lower bound. If the easing proves unnecessary the FOMC can take the cuts back later. We explain in more detail inside.
The rest of the toolkit may be slower to deploy
Fiscal policy may not come to the rescue, leaving the FOMC as 'the only game in town,' if there is a recession next year along the lines of the '91 and '01 downturns. Also, after the recent experience, the FOMC may be slower to move to deploying a large-scale asset purchase program, depending upon the severity of the recession unfolding. Any initial move to asset purchases might also not include MBS. Forward guidance may also be less forthcoming. All of these reasons could reenforce the Committee's conclusion to return the funds rate to the ZLB. For more details, we discuss the issues inside.