America is in the midst of a real-time, real-world economic experiment to discover whether a nation can talk itself into a recession. We know from past experiments that it cannot talk itself out of one. Early in the Great Depression of the 1930s then-President Herbert Hoover sought to lift spirits and the economy by proclaiming, “Prosperity is just around the corner.” The road to that corner proved a rather long one, taking almost a decade to traverse. His successor, Franklin Roosevelt, proclaimed “We have nothing to fear but fear itself.” It turned out that we also had to fear a shaky financial system, inadequate demand, and a tariff war, among other things. Neither Hoover with his hands-off nor Roosevelt with his hands-on approach could talk America out of a recession.
That does not mean, however, that it is impossible to talk America into one. After all, the immediate future of the US economy depends on the willingness of consumers, who account for about 70% of economic activity, to continue spending. Whether consumers will continue to add stuff to their on-line and in-store shopping carts will depend on their continued confidence in their economic futures, which is not easy to measure. The University of Michigan’s consumer sentiment index fell in August to its lowest reading since October 2016. But the Conference Board’s Consumer Confidence Index, despite a tiny decline in August, caused Lynn Franco, director of its compilations to conclude, “consumers have remained confident and willing to spend.”
Consumers are deluged with lots of data, some encouraging, some not. Among the latter are the results of most models. Three out of four of the 226 economists surveyed by the National Association for Business Economics expect a recession by 2021. Models constructed by BBVA Research “suggest 70% probability of recession within 24 months.” A model used by the New York Federal Reserve Bank puts the odds of a recession in the next twelve months at 32%. That would not be overwhelmingly worrisome were it not for the fact that a reading above 30% has preceded every recession since 1960. We do not know whether Fed chairman Jay Powell had seen this study before leaving for Switzerland, where on Friday he told an audience convened in Zurich by the Swiss institute of International Studies, “We are not forecasting or expecting a recession.”
These models are probably less reliable than usual because they cannot anticipate the course of President Trump’s trade war, the escalation of which, according to Franco, “could potentially dampen consumers’ optimism regarding the short-term economic outlook.” Alternatively, an up-tick in the possibility of a settlement can markedly improve investor sentiment, and send share prices soaring, as rumors of renewed negotiations did last week. Nor can models comfortably incorporate the effects of possible continuation of riots in Hong Kong or the mullah’s decision to turn Middle East skirmishes into a hot war.
Besides, these mathematical constructs are not designed to tell consumers how much they can safely spend here and now. For that we turn to a variety of guides. The first is the so-called Beige Book, a Fed survey of current economic conditions around the country was released last week and “suggested that the economy expanded at a modest pace through the end of August…. The majority of businesses remained optimistic about the near-term outlook. Auto sales … grew at a modest pace … tourism activity …remained solid.”
But the housing, agriculture and manufacturing sectors remain weak. The latter accounts for about 11% of total economic activity, and shrank in August for the first time in three years. It is thought to be a harbinger of the performance of the overall economy.
The second source to which forecasters turn is the monthly jobs report. Last Friday’s has economists scratching their heads. Some 130,000 jobs were created, including 25,000 temporary hires by the government as census-takers. Fewer than 100,000 were created in the private sector. The unemployment rate was stable at 3.7%, but count the under-employed and the July rate of 7.0% ticks up to 7.2%. In an example of bad news is good news, most observers agree that these somewhat disappointing data support the Fed’s case for a stimulating interest rate cut later this month.
Still, all is not bleak. Hourly earnings are up 3.2% over last year, the job participation rate rose, and there are one million more job openings than unemployed workers. And the twelve-month average job creation this year, 158,000, is roughly what the economy needs to maintain full employment according to Harvard’s Jason Furman, who chaired President Obama’s Council of Economic Advisers. Powell says that jobs are being created faster than new workers are entering the labor market, which somewhat weakens his argument for lowering rates, but never mind. Finally, The Lindsey Group estimates that the combination of recorded productivity growth and the “big jump” in aggregate weekly hours suggests a sustainable annual growth rate of 3%.
Looking ahead, forecasters are trying to predict the the offsetting effects of the headwinds from the uncertainty created by tariff policy, which is curtailing business investment in the US and globally, and the tailwinds provided by consumer spending and a Fed committed to lowering interest rates. The net effect of the current opposite movements is an economy growing at an annual rate of about 2%, perhaps a bit less. That should continue. Here’s why.
New orders placed with manufacturers last month rose 1.4%, suggesting that the sector’s decline might be coming to an end. Rates for 30-year mortgages are 3.75%, a three-year low, boding well for the housing sector. Gasoline is cheap, leaving more cash available to spend on stuff or “experiences”. Consumer balance sheets are strong. Hourly wages are 3.2% higher than a year ago. Productivity is increasing at the satisfactory annual rate of 2.3%. All in all, “the consumer is in good shape,” as Powell put it last week.
In sum, share-price gyrations and the media’s continued trumpeting of any economic news that might harm Trump’s re-election prospects have not frightened most Americans into leaving their credit cards unswiped. Consumers seem not to fear the fear that FDR believed such talk can provoke. Or to believe that hard times are just around the corner, to invert Hoover’s prediction of prosperity.
The time will come when the piper will be paid for the government’s fiscal promiscuity – its trillion-dollar deficits – but that time remains in what for politicians and many Americans is the far-distant future, perhaps 2021.