In response to recent volatility in the stock market, rising prices (and declining yields) for U.S. Treasury bonds, and difficulties in the trade relationship between the United States and China, some pundits and politicians are forecasting a recession in the U.S., timed to coincide with the 2020 presidential election. The increasing volume of these forecasts is driven partly by partisan hopes that an economic slowdown gives Democrats the best opportunity to defeat President Trump next year. But hopes of this kind do not make for sound economic forecasts.
None of the major institutional forecasters is looking ahead to a recession in 2019 or 2020. The Conference Board, while recognizing risks to the economy, is still forecasting real GDP growth of 2.3 percent in 2019 and 2 percent in 2020. The International Monetary Fund, in a July report, forecasts global growth to expand to 3.5 percent in 2020, with the U.S. economy expected to expand at 1.9 percent. The most recent forecast of the Federal Open Market Committee calls for 2 percent growth in real GDP in 2020, compared with 2.1 percent in 2019. This is the conventional wisdom, to be sure, and such wisdom has often missed the mark, as we saw in 2007 and 2008. Nevertheless, these projections come from current economic indicators, none of which is signaling a recession in the months ahead.
The current economic environment—low and declining interest rates, stable prices, modest quarter-to-quarter economic growth, the absence of wars abroad—does not suggest a recession-oriented climate. In addition, the Federal Reserve Board has adopted a policy of stabilizing or lowering interest rates, another factor likely to reduce the odds of recession. Recessions typically occur in settings of rapid economic growth and rising interest rates, combined with overly bullish forecasts for stocks and business profits. That’s not the situation today.
America’s economy has been expanding at modest annual rates since the last recession ended in mid-2009—but the U.S. has not achieved an annual growth rate of 3 percent over the course of the current recovery. In 2016, real GDP expanded by just 1.6 percent, a frequently overlooked factor in the outcome of that year’s presidential election. Under the Trump administration, GDP expanded to 2.4 percent in 2017 and 2.9 percent in 2018. Over two quarters in 2019, GDP expanded at a 2.6 percent annual rate.
At ten years and counting, the current recovery is now the longest on record—but also one of the weakest, with real GDP expanding by just 25 percent over the course of the decade, compared with 43 percent during the ten-year expansion from 1991 to 2001 and 52 percent over the eight-year expansion from 1961 to 1969. In the mid-sixties, U.S. GDP grew by 6 percent per year, and in the mid-1990s by 4 percent per year, compared with the 2 percent to 3 percent growth rates over the past decade. There is little doubt, as many have pointed out, that the American economy is operating well below capacity, and below benchmarks established in past recoveries. But a somewhat weaker recovery may have greater durability, as it is less prone to disruption by inflation or the Federal Reserve’s interest-rate policy.
The modest nature of the ten-year recovery has been camouflaged to some extent by a strong labor market, which has created 2 million-plus jobs per year since 2010, brought the unemployment rate down to a postwar low of 3.6 percent, and continues to show a positive trend. The Federal Reserve appears to have targeted the unemployment rate (rather than inflation or GDP growth) when it decided to raise interest rates in 2018, an oversight that it has now corrected.
Against this background, the odds of a recession in the United States over the next year don’t appear very high, though the economy could be subject to external shocks—international events, such as terrorist attacks, oil embargoes, and oil-price increases, for example, have provoked recessions in the past. A sustained trade and tariff war between the U.S. and China, the world’s two largest economies, would surely damage the prospects for continued economic growth, for both countries. Since everyone is aware of the costs of such a conflict, good reasons exist to believe that it will be forestalled.
Current forecasts for a recession among pundits are not based on facts or real conditions but on a belief in self-fulfilling prophecies—that by predicting a recession they can create one, and thus set the stage for Democratic victory in 2020. This is a good sign that they have an exaggerated opinion of their own influence and have lost touch with the canons of their profession.