A Motivated Outbreak of 2020 Recessionaphobia

Job growth is remarkably strong this far into the business cycle. The unemployment rate ticked up slightly, reflecting new entrants into the work force, while the workforce participation rate rose 0.2 percentage points to 63.1%. The continued wage and labor market growth reflects the underlying strength in the economy and optimism in the growth prospects going forward.

It has been unkindly observed some meteorologists can’t predict yesterday’s weather. Economic forecasters typically fare little better, especially with regard to turning points, such as a recession’s onset. How is it, then, so many forecasters on the financial news programs predict a recession over a year away?

In defense of economic forecasters – and leaving meteorologists to defend themselves – one should note there is often little immediately apparent difference between contraction and a period of slow growth, which can occur even during the most robust expansion.

Further, even the most important real-time data actually arrive with significant lags and are subject to substantial revision. While of little comfort to those who rely on economic forecasts, it should not be surprising economists often are unsure we were in a recession, even as we’ve already emerged into an expansion.

But turn on broadcast financial programs and one sees a steady stream of recession prognostications for 2020. This was true long before the recent skid in financial markets. As the latest Blue Chip forecast for 2019 is for 2.6% growth, a sudden slide into recession in 2020 would seem a tough sell, but the recessionists each have their own little stories to pitch.

One such story blames the Fed’s steady move toward a neutral monetary policy. One can almost always get TV face time by alleging a Fed mistake, but the whole point of moving to a neutral monetary policy is for the Fed to remove its influence on the economy. That’s what neutral means, so arguing for a recession due to a neutral policy is absurd even if couched in meaningless buzz phrases like “inverted yield curve.”

Another favorite is to observe the expansion will become the longest in post-war history in 2019. The implication? The expansion is getting old and tired. It’s going to run out of gas. It needs a nice recession to catch its breath. Nonsense.

The very nature of an expansion is for it to continue as long as the labor supply grows and as improving technology and capital deepening improve labor productivity. Recessions happen because some policy mistake is so egregious as to overwhelm the forces of expansion, not because the economy needs a respite from so much prosperity.

A popular refrain centers on the word “slowing.” Yes, the economy is slowing. GDP expanded by 4.2% in the second quarter, by 3.4% in the third, and is expected to slow further to about 2.6% in 2019. The economy is slowing from an unsustainable pace to a more sustainable pace. But, as the commentators intone gravely, the slowing economy could slow further. And as a matter of straight line projections, if the economy kept slowing then we’d be at risk of a recession. When? 2020, of course.

It’s entirely possible the economy will slip into recession in 2020. Some disastrous policy mistake can never be ruled out, especially with so many trade war threats and overseas troubles in play. But for the moment, there’s not a scintilla of a hint in the actual economy to suggest anything but a moderate easing toward a sustainable growth path.

True, the housing sector is not exactly bustling, but that’s been true since the expansion began. Also, interest rates ticked up slightly mid-year, but they’ve since slid back and then some, and remain at historically low levels. Wage growth is picking up, and inflation isn’t. The glorious global synchronized expansion of 2017 proved short-lived, but that means a loss of tailwinds, not yet anything suggesting a headwind.

So, what’s really going on here with this recessionaphobia among the punditry? Are they suddenly becoming grumpily pessimistic en masse? Are they just playing to the apparent viewer preference for roiling grey skies, just as scary movies tend to outnumber happy ones?

Or maybe all those forecasts are playing to another feature. Is anything happening in 2020 worthy of note? Is there, perchance, a presidential election in the wind? Might that be playing a factor? You decide.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.