The Real Recession Odds: Perception Versus Reality

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If Paul Revere were alive today, the financial media would have quoted him as saying, “A recession is coming! A recession is coming!” There is just one major problem. Not everyone agrees with the assessment that a recession is imminent. Moreover, if a recession does come, and the policies of today remain more or less status quo, then the next recession is not expected to be much more than what economists call a “garden variety recession” rather than a replay of the Great Recession of a decade ago.

24/7 Wall St. has been tracking the actual versus the perceived recession risks that the public keeps hearing about. This includes tracking actual economic data, corporate earnings and guidance, varying industry reports, economist and analyst reports, and even the daily financial market’s ups and downs. There are obvious risks that are already on the table that could lead to a recession — tax cuts have been fully factored in, the U.S./China trade war is no longer just a dispute, weakening job growth, weaker economic growth, slower corporate profits, an on-again-off-again inverted Treasury yield curve, over $15 trillion in negative bond yields between Europe and Japan, an inability for inflation to run where central bankers would want it to be, and there are even more issues.

All these negatives probably sound like they have to add up to another recession. That just isn’t automatically true in 2019, nor is it a foregone conclusion yet for 2020. History dictates that a recession will come. With the economic recovery being the longest of our lives and with the great bull market in stocks being 10 and a half years old, the constantly reported imminent recession actually may be overblown. It would be silly to say that a recession cannot be possible, but all the negative forces of today do not currently add up to a U.S. recession as a definite outcome in 2019 to 2020 (and not even definite in the immediate years after that).

It’s easy to be confused or even tricked by the daily media headlines. It’s also hard to ignore that some calls for recession are for political gain. This is not the first decade (and likely will not be the last) in which those calls have been heard. It’s also important to consider that “recessions” are not even equally defined from source to source. Traditional recession measurement taught by most economic classes is simply two consecutive quarters of negative gross domestic product (GDP), but the National Bureau of Economic Research uses a measurement of when the economy peaked to when it bottomed out and began improving.

Here we have compiled some public comments and reports, and we also have received multiple direct responses from various groups opining about the probability, timing and severity of the current recession odds. Again, one would be easy to be tricked into thinking the next recession is imminent by only read headlines using “recession” as an attention-grabber.

Given the trade war between the United States and China, we have compiled the actual numbers behind the office of the U.S. Trade Representative to show how much in actual goods actually are imported from China and how much are actually exported to China. The tariff numbers may sound atrocious on the surface, considering they run in the hundreds of billions of dollars, but the United States is now already more than a $21 trillion economy measured by GDP.

During the week of September 6, the Federal Reserve Bank of New York’s recession probability indicator showed that the odds of a recession appearing by August of 2020 were running at 38.0%. The prior reading was just 31.5% by July 2020.

Federal Reserve Chair Jerome Powell spoke on Friday, September 6. While he did not directly state whether the Federal Open Market Committee would cut interest rates in September, Powell did indicate that the Fed would do what was necessary to keep the expansion going and the markets interpreted that as a “yes.” That said, Powell’s words were very direct and clear on a broader issue: “We’re not forecasting or expecting a recession.”

Fed forecasting tools are not suggesting a recession, based on actual economic reports. The New York Fed’s Nowcast from September 6 was for 1.5% GDP growth in the third quarter of 2019 and 1.1% in the fourth quarter. The most recent data did lower those forecasts by 0.3 percentage point for the third quarter and 0.5 percentage point for the fourth quarter. The Federal Reserve Bank of Atlanta’s GDPNow model was updated on September 4 and suggested that third-quarter GDP would come in at 1.5% growth (down 0.2 percentage point from the prior reading).