Another recession? It’s not inevitable, if the Fed acts wisely
Just because the United States hasn’t had a recession in nine years doesn’t necessarily mean one is coming. With the right mix of good luck and sound policy, the current expansion could break the record for longest in US history — 10 years — and then go on for another decade.
It has happened elsewhere. Australia hasn’t faced a recession since 1991. The Netherlands enjoyed 25 straight years of growth beginning in the early 1980s.
Best as economists can tell, the odds of a recession are roughly the same in the ninth year of a recovery as they are in the third. There’s no schedule, no natural process by which recoveries grow, peak, and then die. Recoveries have to be killed off, which can happen at any time.
Looking ahead, then, the key question isn’t “how long can our recovery last” but “what will kill it.” We might as well start by rounding up the usual suspects, because recovery-killers tend to strike again and again.
Oil shocks, for instance, used to be a regular trigger for US recessions — the most infamous example being in 1973, when an OPEC embargo drove up oil prices and stifled economic growth.
But rising oil prices aren’t the threat they used to be. Not only are there more alternatives for heating our homes and fueling our cars, including renewables, but the United States is no longer at the mercy of foreign producers. Thanks to the fracking boom of recent years, we’re now among the world’s biggest oil producers. Which means there are now lots of domestic companies — and workers — who would benefit from higher prices.
Given that our last two recessions were set off by bursting bubbles — the dot-com bubble of 2000-01 and the housing bubble in 2007-08 —
this might seem a more urgent concern.
Scan the horizon, though, and it’s not clear where today’s bubbles might be forming. Bitcoin and other cryptocurrencies have already fallen from their December peaks, and while household debt is rising, it remains much smaller than it was in the depths of the subprime mortgage fiasco (compared with household income.)
If the immediate risks aren’t visible, perhaps that means the most worrisome threat to the US economy is an unexpected shock, like a sudden slowdown in China, a housing collapse in Canada, a war with North Korea, or a major terrorist attack on US soil. Any of those could push the country into recession, not to mention the long list of potential shocks we’re too short-sighted to fully recognize.
Ultimately, though, the biggest risk to the US economy may come from our own government, or more specifically the Federal Reserve. Month-to-month, no agency has more control over the growth — and potential disappearance — of jobs, income, and profits. A few wrong moves could mean the difference between thriving and crashing.
This is far from theoretical. Most of the recessions since World War II have been caused by the Fed. Some of them deliberately — like the effort to restrain inflation in the early 1980s — others by slamming on the economic brakes when a tap was needed.
Today’s Fed finds itself in a precarious position. Many of its most expert voices have recently left, and the economy continues to flash contradictory signals about whether growth is too slow or too fast. Wage growth and inflation remain muted, even as the unemployment rate approaches 50-year lows and big government deficits add unexpected stimulus.
Fed members have committed themselves to at least some tightening, with plans to raise interest rates several times this year in an effort to keep the economy from overheating and prevent the emergence of any dangerous bubbles.
A lot hinges on their choices, though. If they find the right approach, they may be remembered as the policy makers who did away with recessions, opening the United States to a world where growth lasts not for years but for decades. Judging from history, however, they are just as likely to end up in the role of recovery-killer, triggering a recession that wasn’t the least bit inevitable.