After a couple of wild weeks, with financial markets and the economy sending mixed signals, the question of the moment is: Are we on the verge of a recession?
Looking at the rest of this year, almost all forecasters say no. While the US economy is slowing, the output of goods and services should continue at a respectable clip of about 2 percent. The unemployment rate is expected to remain near a 50-year low (it was 3.7 percent in July), and a spike in inflation is on no one’s radar.
But the picture is far less certain if we peer farther down the road.
In a survey released Monday by the National Association of Business Economists, 38 percent of respondents said they expected a downturn in 2020. The good news: That’s a dip from 42 percent in the group’s survey in February, before the Federal Reserve made clear it would ease interest rates as needed to extend the economic expansion.
The caveat: Most respondents to the survey, which was taken July 14 through Aug. 1, replied before the trade fight with China escalated. On Aug. 1, President Trump ordered tariffs on an additional $300 billion of Chinese goods. Beijing responded by letting the value of its currency slide against the US dollar, which was seen as a retaliatory move.
Since then, US stocks have taken a bumpy ride lower, and bond investors are acting like they consider a recession inevitable.
Still, given all the concern recently about corporate America growing cautious, it is interesting, even heartening, to see some business economists pushing back their recession forecast to 2021. Thirty-four percent of those surveyed by the NABE don’t see the economy contracting until 2021, up from 25 percent in February.
“Survey respondents indicate that the expansion will be extended by the shift in monetary policy,” Constance Hunter, chief economist at KPMG and president of the NABE, said in a statement.
In other words, the Fed’s willingness to keep credit flowing — confirmed with its quarter-point rate cut on July 31 — probably keeps the economy moving forward through next year.
That would be good news for workers, management, and investors. It would also benefit Trump as he runs for reelection next year. A recession before November 2020 would seriously hurt the president’s bid for a second term.
Recent economic data show manufacturing declined for two consecutive quarters, and business invesment softening.
But consumers remain confident and are continuing to spend, which is essential, since our purchases account for more than two-thirds of economic activity. In July, retail sales rose a faster-than-expected 0.7 percent.
“I think they’re mainly feeling what’s going on in the labor market — people are getting jobs and real wage growth is a little higher than it has been,” said Megan Greene, the NABE’s survey chair and a senior fellow at the Mossavar-Rahmani Center of Business and Government at the Harvard Kennedy School. “We see the same phenomenon in Germany right now. The economy is circling the drain, but if you speak to regular Germans about it they haven’t noticed because unemployment is low and their standard of living hasn’t suffered.”
So what could trigger a recession before 2021?
The list of threats has become familiar: tariffs and the trade war; recessions in key economies such as China and the aforementioned Germany; a decision by Britain to exit the European Union without a divorce agreement. (The NABE survey found 60 percent of respondents anticipate a no-deal Brexit or a “hard Brexit,” which could entail some kind of transition agreement.) And we can’t rule out a shock from a military confrontation with Iran or North Korea.
“Often, a recession results when some widely held belief about the world turns out to be false,” Neil Irwin of The New York Times wrote over the weekend. “In 2001, it was that a technology boom would fuel the economy and the stock market indefinitely; in 2007, it was that the housing market would never melt down across all regions at once.”
These days, Irwin said, events are undercutting our belief in progress — “that the world will only become more stable and interconnected over time, and that trade, currency and diplomatic relationships can be counted upon.”
That’s a scary proposition. Unfortunately, it’s an entirely reasonable one, too.