Is a Recession Coming?

Traders work on the floor of the New York Stock Exchange on November 20, 2018.
Traders work on the floor of the New York Stock Exchange on November 20, 2018.BRENDAN MCDERMID / REUTERS

If you’re going to worry about the economy, tumbling stocks are the least of America’s financial troubles right now.

In December 2007, Larry Kudlow, then a talking head for the business network CNBC, proclaimed, “There’s no recession coming. It’s not going to happen.” That same month, the economy plunged into the worst economic downturn since the Great Depression.This week, Larry Kudlow, now the director of the National Economic Council, stood on the White House lawn and struck a familiar note: “I’m reading some of the weirdest stuff [about] how a recession is right around the corner. Nonsense,” he said. “Recession is so far in the distance, I can’t see it.”Perhaps, as morning follows the rooster’s crow, an imminent recession looms behind Kudlow’s latest optimistic squawk. The outcome certainly seems possible if you’ve recently been torturing yourself by following the stock market. After the Dow Jones Industrial Average sank 550 points on Tuesday, the past few weeks qualify as no mere correction, but as one of the worst stock meltdowns of the past few decades. Some analysts say it could get worse.

Cascading stock prices might seem like a random crisis if you’ve been paying attention to the overall economy, which is booming. At 3.7 percent, the official unemployment rate is the lowest of this century. Job satisfaction is at its highest level in more than a decade. Small-business and consumer confidence hitrecord highs this year.

Observing the gap between Wall Street jitters and Main Street optimism, some are inclined to point out that “the stock market is not the economy.” But you should resist that temptation. The stock market is not the entire economy. (Neither is wage growth or health-care spending.) Rather, the stock market is a part of the economy that reflects both the value of capital investment in public companies and a prediction of their future earnings. As labor costs increase (good news for workers), and interest rates creep up (good news for traditional savings accounts), cost of business increases for many large companies, which can hurt their stock value.For many years, corporate profits thrived as labor costs were low. Now corporate profits are at risk as labor costs are rising.But this parallelism isn’t very satisfying for investors and businesspeople who want to know what happens next. Could a downturn on Wall Street trigger a decline in business investment that could ripple throughout the economy? Or, to cut straight to the point, is there gonna be a recession, or not?

One way to predict the likelihood of a recession today is to look back at the past few downturns and evaluate whether the U.S. economy is in danger of repeating history.

Let’s start with the 1970s, when a series of oil crises contributed to a rare period of stagflation. (The portmanteau signifies a combination of stagnant growth and high inflation.) Today, conversely, oil prices are low, which helps consumers and businesses feel richer while hurting the energy industry. Despite the fact that the U.S. is now the world’s leading oil producer, America is predominantly a consumer-and-services economy, not an oil-and-exports economy. Even a long-term decline in oil prices is, therefore, unlikely to cause a serious downturn.

The recession of the early 1980s was a byproduct of the Federal Reserve’s decision to jack up interest rates to cool off rampant inflation—somewhat like a fire department flooding a house to save it from a fire. But today’s economy is neither burning nor flooding. Although the Fed is again raising rates—and there is a robust debate among monetary-policy analysts over whether, and how fast, it should do so—the baseline couldn’t be more different. Inflation is low, and—relatively speaking—so are rates…

F. Kaskais Web Guru

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