A stock-market thumping and global slowdown triggered fresh worries about a recession at the end of 2018, but hardly anyone thinks the U.S. economy will go into a tailspin this year. But what if the experts are wrong?
The first recession in almost 10 years would likely require key decisions makers in Washington to make some bad calls. And a lot of bad things would have to happen at the same time both here and abroad.
“It would have to be a lot of self-inflicted wounds,” said chief economist Richard Moody of Regions Financial.
First in line: The Fed
Most if not all modern recessions have been spawned by the Federal Reserve raising interest rates sharply to prevent inflation from getting out of hand, economists contend.
In some cases the U.S. had also been afflicted by asset bubbles that threw the economy out of whack. Think the housing boom that proceeded the Great Recession or the Internet craze of the late 1990s.
Neither condition applies right now.
The Fed has raised a key short-term interest rate from near zero a few years to the current range of 2.25% to 2.5%, but it’s still quite low historically and just barely above the rate of inflation.
What’s more, the Fed has proven to be quite sensitive to any hint of slower U.S. growth in the years since the Great Recession ended in mid-2009. The central bank has repeatedly backed off efforts to do away with cheap credit at the first sign of trouble.
The Fed is doing so again. After last month’s stock-market meltdown (.DJI), a decline in inflation and reports of a slowing U.S. economy, Chairman Jerome Powell said the Fed will be “patient.” Other senior Fed officials have also chimed in with soothing words.
What about an economic bubble? It’s hard to spot one.
The housing market, for example, has taken a turn for the worse and is nowhere near as frothy as it was in the early 2000s. Households aren’t as deep in debt as they were a decade ago. And companies have been unwilling to make big speculative bets on future technologies.
The China syndrome
What about a surprising outside-the-U.S. shock, such as recession in China? Could that tip the U.S. into its own recession?
China accounts for a huge 10% of overall global imports, and it’s the top trading partner for many countries. Now the slowdown in China appears to be hurting other major economies such as Germany that also do lots of business with the U.S.
“Can China cause a recession? I don’t think so,” said Markus Schomer, chief economist at PineBridge Investments. “The U.S. is just not dependent enough on exports in general for that to be enough of a shock.”
Yet the Trump White House still needs to be careful to avoid shooting itself in the foot, economists say. The giant Asian economy appears to have slowed in no small part due to stiff tariffs imposed by the U.S. in an ongoing dispute over trade rules.
The U.S. is not entirely immune from that.
Although the U.S. is less reliant on trade than most other nations, imports and exports represented 32% of the economy in 2017 — up from 22% two decades earlier.
If large American companies such as Apple (AAPL), see a dip in sales and profits tied to exports, they could reduce hiring or even resort to outright layoffs and deal a blow to consumer confidence. Stocks (.SPX), could also take a big hit again and undermine investor confidence.
Consumers are critical
So far consumer confidence remains high and that’s the strongest bulwark against recession. As long as the unemployment rate remains low and Americans are working and spending, companies are unlikely to scale back much.
“Most Americans are not invested actively in the stock market,” said Andrew Chamberlain, chief economist of Glassdoor, a labor-market research firm. “The psychology of slowdown hasn’t infiltrated the real economy. The real economy is in very good shape.”
Which brings the question back to the Fed. Will the Fed set off another recession by raising rates too high?
The central bank has time to be patient in light of a recent decline in inflation pressures linked to lower oil prices. Some economists think the Fed will temper its forecast for future increases in interest rates.
Yet many on Wall Street aren’t convinced that Powell, who’s only been in the job for one year, has come up with a suitable compass to guide the Fed and economy forward. They point to his remarks last week backing off from more aggressive statements a few months ago about how high the Fed would raise rates.
“I am worried that Powell doesn’t have the framework in the back of his mind,” Schomer said. “I am not sure we are out of the woods that the Fed won’t overtighten.
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