You Never Know When a Recession Will Sneak Up on You
President Trump’s new budget calls for less spending on Medicare and food stamps and more on defense and on a wall on the southern border.
Democrats condemned the proposal, and the dispute raises the prospect of another government shutdown this year. That might seem to be a dicey proposition for the economy, but the administration doesn’t seem worried about a slowdown any time soon.
The president has described the current moment as “the greatest economy in the history of our country,” and the official forecast is rosy: around 3 percent growth in gross domestic product every year for the next decade, and even more in 2019 and 2020.
Yet some serious people remain nervous.
Job growth last month came in wildly below expectations. G.D.P. growth, which hit an annualized rate in excess of 4 percent in the second quarter of last year, has been fading ever since. The Federal Reserve Bank of Atlanta’s GDPNow forecast suggests that the current quarter’s annual growth rate might even be below 1 percent.
Faced with data like this, the Federal Reserve has backed off from its plan to aggressively raise interest rates and shrink its balance sheet.
It is worth asking: If a trade war with China or another government shutdown remains possible, are we one wrong turn away from a recession?
The Trump administration says these potential problems just aren’t big enough to derail a $20 trillion economy. But the last several decades of American economic history provide a sobering reminder that recessions don’t come only from large, foreseeable events.
Modest, unpredictable incidents can cause economic downturns if they lead businesses or consumers to freak out. And trade wars and government shutdowns have caused some glaring panics in the past.
Still, it is easy to understand the administration’s perspective. First, officials remain confident that they can strike a deal that will avert a major trade war entirely. Second, even if there is a trade war, it might not damage the United States that much. After all, exports account for only 12 percent of the nation’s economy, while China is less than a tenth of that.
Those numbers imply that even a full-blown trade war that cut commerce between the United States and China in half would have a direct impact of less than 1 percent of G.D.P.
The same basic math can be applied to government shutdowns. The administration estimated that the last one, which ended in January, cut only about 0.1 percentage point from the annualized economic growth rate per week.
The 800,000 affected federal workers were fewer than one half of 1 percent of the nation’s total work force, so even when government contractors are added, the shutdown affected just a sliver of the country’s G.D.P. No worries there.
But that analysis is far too simple.
Seemingly small events can cause enormous problems. Think back to 2001 and the last recession of a “normal” size. (The recession that started in December 2007 was, by far, the deepest and longest since the Great Depression — about as far from normal as a recession can be.)
The 2001 recession developed when the internet bubble popped, or at least that’s how we tend to remember it. But go back and check the numbers. The internet accounted for, at most, about 2 percent of the economy then. If we use the logic we’ve been applying to trade wars and government shutdowns, it would seem that popping the internet bubble shouldn’t have been enough to cause a recession. But it did.
The reason it did was that the pop freaked out people outside just the internet sector. Consumer confidence plunged, and businesses stopped investing. The recession spread far beyond its origin.
In this sense, virtually every recession in the last 40 years coincided with a signal of fear, like a significant drop in consumer confidence. Sometimes confidence fell and didn’t spiral into recession, but all recessions have started with a confidence spiral.
The very biggest drops in confidence in the last 40 years came from major events like the collapse of Lehman Brothers in 2008 and the popping of the internet bubble, which led to recessions, but close on their heels were episodes of government dysfunction, which did not necessarily culminate in recessions. These include the debt ceiling crisis of 2011 and the government shutdown of 2013.
The most recent shutdown seems no different in this respect. In the last survey before the government reopened, consumer confidence fell the most it had in almost three years, and confidence among chief executives dropped to the lowest level in seven years. The shutdown doesn’t seem to have caused a recession, but it would be unwise to celebrate.
Another government shutdown could spiral into something far more damaging than the small decline in workers’ share of the economy that the simple math suggests. An escalating trade war with China could ignite a recession, even if the numbers show that trade isn’t a large share of the United States economy. These events just need to spook consumers or businesses into putting off spending, and then more dire consequences can start to snowball.
So let us all hope for excellent jobs numbers in the months to come, along with a rebound of G.D.P. growth. That may well happen, but it would be a mistake to be overconfident and assume that the economy will automatically weather a major policy blunder. If something scares people enough, it can start a recession, and you probably won’t know until it’s too late.
That’s because recessions are hard to recognize at the start. Looking back, for example, we know that a recession officially began in April 2001, yet scarcely anyone understood that then. In June 2001, only 7 percent of economists in the monthly Blue Chip survey believed a recession was underway. In the months before that 2001 recession began, only 16 percent of economists expected that a recession would start within the next year. Now, 25 percent of economists in a Wall Street Journal survey say they expect a recession within the next year, and anxiety seems to be growing.
The great pitcher Satchel Paige once advised: “Don’t look back. Something might be gaining on you.” Had he been an economist, he might have added, “And don’t start a trade war, either.”