The next recession will probably start much like the last one

pulse

June 25, 2017 2:23 PM

"The main cause of the next recession will perhaps resemble more closely that of the latest one – a financial cycle bust,' the BIS report says.

Demonstrators from the Neighborhood Assistance Corporation of America protest inside the Bear Stearns headquarters lobby in New York.

The US economic expansion is nearing its eighth anniversary, prompting some investors to worry the recovery could be running long in the tooth.

So what will trigger the next recession?

It's become a new Wall Street adage that economic recoveries don’t usually die of old age. Rather, they are often the result of an active central bank policy to slow an overheating economy.

"The main cause of the next recession will perhaps resemble more closely that of the latest one – a financial cycle bust," the BIS report says.

"While an inflation spurt cannot be excluded, it may not be the main factor threatening the expansion, at least in the near term," the BIS adds. "Judging from what is priced in financial assets, also financial market participants appear to hold this view."

Yet Fed officials seem squarely focused on the potential for overheating as they continue to raise interest rates this year despite signs that inflation is actually moving further below the central bank’s 2% target, which it had already undershot for the bulk of this recovery.

Labor’s lower pricing power is consistent with the decline in Labor’s income share in many advanced economies. And it may also help explain why wages have not always kept up with productivity trends."

Barring a redux of the financial crisis, BIS economists foresee another possible risk to expansions in the United States and other developed nations, one that also does not involve inflation: a collapse in consumer demand cause by excessive household debt.

Still, there’s one issue on which the BIS is fairly conclusive: "

Let’s hope Fed officials are listening.

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