Recessions in the US are going to start happening more often

The US economy could experience more recessions in the coming years for one simple reason: slower growth.

The commonly accepted definition of a recession is two consecutive quarters of negative GDP growth.

The National Bureau of Economic Research — which officially makes the call on whether or not the US economy in recession — has its own criteria, but technicalities aside, few people are going to argue with a characterization of the US economy as being “in recession” if we see two-straight quarters of negative growth.

But in a note to clients on Wednesday strategists at Morgan Stanley argue that if the potential growth of the US economy is lower in the coming years then these occurrences are going to be more likely.

The basic comparison the firm makes is between the US and Japan. (Of course, Morgan also notes that comparisons between the US and Japan happen too often and are largely misguided. Apparently this is an exception that ought to be allowed.)

Over the last 20 years Japan has seen 30 quarters of negative GDP growth and 19 quarters of recession.

But as Morgan Stanley writes, when potential growth is 1.5% instead of 3%, you don’t need to slow that much in order to trigger the commonly accepted definition of recession. And so you might see recession more often, but they won’t be economic catastrophes.

And so while US potential GDP is projected to rise back towards something like 4% in the coming years, post-recession nominal growth trends have been lacklustre.

And if trend growth projections formally come down, the probability for these narrowly defined recessions goes up.

Morgan Stanley’s main point is that markets are probably best-served widening their definition of recession away from two quarters of negative growth because falling from 1.5% growth to contraction indicates a smaller drop in output than a decline from 3% growth to contraction.

“Negative growth and recessions are simply more likely when trend growth is lower,” the firm writes. “Deep recessions will occur, but the majority of episodes of recessions of sequential negative growth are likely to be shallow, and less painful.”

The hottest topic in markets right now is whether or not the US is heading towards recession.

The Fed’s own model says probably not (putting the probability at a bit less than 4%), though market-types who want to ballpark a number with a lot less rigour will probably give you something like 15%-50%, depending on their priors.

And while it is always technically true once we come out of a recession that we are heading for the next one, at least under some formulations the next one might not be a huge deal.

Or maybe it will.

NOW WATCH: Astronauts found something troubling in these shots from space

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.