Econ­omy May Weaken But Re­ces­sion Un­likely

Commentary

By Mike Walden

It’s that time of year when economists are looked to as fortune-tellers. The fortune, in this case, is our collective well-being tied to growth in the overall economy.

Of course, no economist — no matter how well-trained — can perfectly predict the future of a $19 trillion economy like we have in the U.S. It’s just too big with too many moving parts. A good example of my profession’s shortcomings was our inability to predict the depth of the Great Recession of 2007-09. So any forecast has a large dose of an educated guess.

With this caveat, let me get started. The most asked question I receive today about the economy is whether growth will continue, or if we’re about to slip into another recession. Part of the reason for recession worries is that, come next June, the current period of sustained growth will be the longest in the nation’s history. Therefore, are we living on borrowed time?

To see if a recession is imminent, economists look for imbalances that can tip the economy off course. The major cause of the Great Recession was debt payments that overwhelmed household budgets. Today, household debt payments are a much more modest share of household income. Some measures have the debt payment share at a historic low. The same is the case for business debt when measured against business net worth.

Large increases in oil and gas prices were behind two recessions in the 1970s. Most of the additional revenue for oil and gas flowed outside the country since we were a big importer of oil. When households spent more for oil and gas, they spent less on products made in this country, which directly led to an economic downturn.

Our situation today is different. Oil prices have been falling in recent months due to an abundance worldwide. Second, the U.S. is now a leading world producer of oil. We are also a net exporter of oil. So, if oil and gas prices rise — which many analysts think will occur in the first half of 2019 — the increases can actually pump money into the U.S. economy, not out of it.

Therefore, current trends in household debt, business debt and oil prices don’t suggest an oncoming recession. However, there are three parts of the economy that could give us recession worries — international trade disputes, Federal Reserve policies and the stock market.

The key trade dispute is with China. The U.S. has long complained China has not opened its economy as much to our companies as we have to theirs. We have also charged China with using tactics to access our intellectual property and business secrets.

The Trump Administration has tried to get China’s attention to these matters by levying higher tariffs on products they sell in the U.S. China has retaliated by raising tariffs on U.S. products sold in their country. These tariffs have disrupted trading patterns and supply chains and have hurt exporters in both countries. U.S. farmers have been particularly harmed.

The worry is that if the trade dispute continues and possibly intensifies, it could lead to significantly slower economic growth. Most economic analysis agrees, although the reduction in growth rates might not be enough to spark a recession. Still, the “trade war” should be watched.

After keeping short-term interest rates effectively at zero percent for five years, the Federal Reserve has been gradually inching them higher. The Fed wants rates higher so that — whenever the next recession occurs — it can lower rates to stimulate the economy. It also worries recent economic growth is causing higher inflation. The Fed is using higher interest rates to moderate growth and so keep a lid on inflation.

The problem is the Fed’s policy is not an exact science. Higher interest rates reduce borrowing, and with reduced borrowing goes reduced spending. If spending drops too much, then recession could result.

I don’t see the Fed’s interest rate policy causing a recession in 2019, mainly because I think the Fed will back off its policy. Already some Fed officials have said they may have raised interest rates enough. The Fed is often purposefully unpredictable though so it could surprise me.

The stock market reacts to economic news and to how that news might impact the financial future. In this sense, trends in the stock market are a composite of all the factors I’ve discussed. If those trends are positive, the market should gain; if they’re negative, expect the market to fall. Falling wealth in the stock market also causes reduced spending.

Taken together, my assessment is the combination of all these factors will still result in economic growth — that is, no recession — in 2019. Production, income and jobs will all increase, but likely at less robust rates than in 2018. But do remember economists’ checkered track record, so you decide how valuable these forecasts are!

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist at North Carolina State University.