An Honest Look At Recession Risk
EPB Macro Research
The way a recession occurs, despite popular opinion, is that the broad economy slows sufficiently across income, sales, production, and employment to make the economy vulnerable to an economic shock. The shock is what causes the actual recession, and the slowdown in economic growth is what makes the economy vulnerable to a shock.
The more severe the slowdown becomes, the less dramatic a shock must be to tip the economy into a recession.
When an economy has slowed sufficiently and becomes vulnerable to a shock, Lacy Hunt describes this phase as the "ease-off" phase of the economic cycle and economist and economic cycle forecaster Lakshman Achuthan calls this the "window of vulnerability." We use these two phrases interchangeably.
The received wisdom is mistaken on how recessions are made. They are not simply caused by shocks. They are caused by a window of vulnerability in the economic cycle where the cyclical drivers of the economy have weakened to the point where it’s susceptible to a negative shock. Within that window of vulnerability, virtually any reasonable shock becomes a recessionary shock. That’s how you get a recession.
- Lakshman Achuthan, Economic Cycle Research Institute
The business cycle is on the cusp of the window of vulnerability but not quite there yet.
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