Is it folly to predict a recession?
Published in Worth, Edition 4 2019
The old rule of thumb is that a recession is two consecutive quarters of negative GDP growth. However, the National Bureau of Economic Research uses a broader definition:
A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.
NBER usually does not confirm that we are in a recession until after the fact. For example, it took the bureau until November 2008—nearly a year—to tell us that we had been in a recession since December 2007, though most of us already clearly knew it.
There is an old joke that the stock market has predicted nine out of the past five recessions. The point, of course, is that predicting a recession is difficult, to say the least. However, if you constantly predict that a recession is coming, you will be right eventually. At this particular time in the cycle, there are many data points that might make you believe a recession is coming. The big indicator that many draw attention to is the inversion of the 10-year and 2-year Treasury bills. Though it has proven relatively accurate in the past, it could take as long as two years after this indication emerges for a recession to occur. In the world of capitalism, recessions are a natural and inevitable outcome, but they are not always as horrific as the Great Recession of 2008.
Although many indicators suggest that a recession may be on the horizon, there are also many reasons to believe one will not occur, at least not in the near future. Consumer spending represents roughly 68 percent of our GDP, and with unemployment levels at their
lowest in decades and incomes rising, it does not appear that we are heading for a recession anytime soon.
This can change—and quickly—at any point, but I think that what people are truly afraid of is the eventual end of this expansion as we have been in the longest period of economic growth on record. We are indeed slowing down here in the United States, but from relatively
lofty levels. There are certainly economic problems in Europe, South America and China, among other places, but we are doing pretty well considering the headwinds, such as the trade war.
Interestingly, there is more talk than usual in the media of a recession. Many anti-Trump media outlets seem to be rooting for a recession in order to increase the odds of Trump’s losing reelection. The media by itself can’t cause a recession, but it can certainly frighten
people into being more conservative with their money.
In the end, the joke says it all. It is with great certainty that we can make the following prediction: We will have a recession one day, but not today!