Written by JP Morgan. A keenly debated topic is when the next recession will occur and what will be the trigger. Attention has tended to focus on the U.S. given that it’s ‘late cycle’ on many metrics. As the world’s largest economy, the U.S. has the ability to drag the rest of the world down with it. To say the expansion is long in the tooth is somewhat of an understatement. If the current expansion continues until the middle of next year, then it will be the longest expansion in U.S. history. Given that full employment was reached a little while ago, it would be rare for an expansion to last more than a few years beyond this point without overheating. The more important question is not the timing of the next recession, but rather, what will it look like? Because while another recession is inevitable, another global financial crisis is not. A shallower recession The severity of a recession is dictated by what causes it, and usually the ballooning of any imbalances in the economy. The bigger the imbalance the more severe the outcome. This cycle may be different. Through inflation targeting regimes of the central banks or responsiveness of companies to the economic shifts, the U.S. economy’s growth profile has become more stable over time. Between 1947 and 1985, the average growth rate of the American economy was 3.7%, with a one standard deviation move of 4.8% points in either direction. As the economy has matured, the growth rate has slowed, but it has also become less volatile. After 2008, the average growth rate of the U.S. is 2.1%, but is two thirds less volatile than prior to 1985. There is little to suggest the slower and less volatile model should change, barring a large exogenous shock. Housing, autos and inventories are the ‘high beta’ sectors that account for the bulk of the economic oscillations around recessions and recoveries, none of which are showing signs of large imbalances in the economy that would facilitate a recession. While light vehicle sales may have peaked, they have been above their long run average since the middle of 2014 – essentially recovering all the lost demand from 2008 to 2012. Activity in the housing market has taken longer to recover, but again indicators have settled around average levels. Meanwhile, inventory management systems have come along in leaps and bounds. There is no longer the need for businesses to estimate their levels of demand with long lead times or to hold huge stockpiles of inventories.The last recession was so severe in that it…

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