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How to sound smarter next time you’re asked about recession risk

by Meg White

How to sound smarter next time you’re asked about recession risk

William Strauss, senior economist with the Federal Reserve Bank of Chicago, speaking at a real estate forecast event at Roosevelt University

William Strauss is generally not surprised when non-economists assume the United States is on the brink of a recession.

The senior economist with the Federal Reserve Bank of Chicago noted at a real estate market forecast event held at Roosevelt University Tuesday that the current financial climate represents the longest expansion in recorded history. The economy has now grown for 126 consecutive months, which is half a year longer than the previous record set in the 1990s and twice as long as an expansion would typically last. But that’s not what people should be looking at, according to Strauss.

“Except that is not how recessions happen,” he told the audience. “They don’t just happen because we run out of steam… You need something bad to happen, something that alters your behavior.”

Strauss singled out “big ticket” items, like wars or a major sector of the economy going haywire, like the housing market did in the last recession, as more likely triggers for recession. But even when the economy does experience these “negative economic shocks,” it still doesn’t automatically create an environment conducive to recession. One prime example of this is the escalating tariff wars threatening to destabilize relations with China and Mexico this past year. While Strauss told the audience that they definitely impacted manufacturing and slowed overall gross domestic product data, recession was not the ultimate result.

Understand how to apply the data

One major problem in economic perception is in seeing the full story, rather than just looking at top-line numbers. Strauss noted that in a recent poll of economists, around 20 percent predicted a recession in 2020, which doesn’t sound all that great to the layperson. However, when one considers that recessions come an average of once every five years, “you have just about as much a chance of recession as any other year” considering that one out of five equals 20 percent, Strauss said. 

While economists were a bit more bullish on 2019 than 2020, Strauss agreed with the majority. “I don’t see a risk of recession out there,” he said. “We have not seen an event that rises up to a level that puts the U.S. economy at risk of a recession.”

Strauss also noted that there are so many economic indicators out there that it can be hard for the average person to know how to interpret their impact on the overall picture. For example, the term “housing starts” might make one think this home-construction data point represents forward-looking data, but “it’s actually permits that are in the leading economic indicators” that the Fed examines, since “you have to pull a permit before you start.” Similarly, Strauss suggested avoiding the stock market as a reliable predictor: “You could be very misled if you used it as an indicator of the next recession.”

See Fed policy in the round

While drama around what the Fed will do with interest rates often roils around critical tweets from President Donald Trump and perceptions of the health of the economy, Strauss noted that the decision of when to raise or lower rates is generally much more nuanced. 

For example, he noted that in the decisions to lower rates last year, the reasoning wasn’t necessarily because the economy needed a boost, but rather because inflation wasn’t yet where the Fed had promised. 

“We’re telling the market that we want to have a 2 percent inflation path,” Strauss said. However, he added that “inflation has been stubbornly stuck at that 1.5 percent.” The policymakers who voted for the change were concerned that the Fed’s credibility was at risk, and that the market might adjust its expectations to meet that 1.5 percent figure, rather than expecting 2 percent over the long run.

Overall, Strauss did note that the Fed is predicting interest rates will rise slowly over the next couple of years, but that in 2022 they will likely be “still below the levels of interest rates that existed in July of last year.”

Get a broader view of economic health

At the moment, the Fed isn’t predicting any major change in the economy. Strauss said in terms of the housing market, he thinks it’ll “continue to show gains, but not impressive gains.” 

Strauss suggested being in tune with other sectors of the economy to assess overall health. For example, he noted the United States became a net exporter of energy in December. “We had a major event that took place in the last month that has received very little attention in the media,” he said. “We are now the dominant player in the energy market.” Strauss noted that this fact puts the country on a different footing than it had been ahead of other recent recessions, particularly when it comes to consumer spending and global economic rankings.

Still, in the grand scheme of things, the way a person sees the possibility of a recession is more a reflection of their attitude than anything else. “You want to be happy? They’re not predicting a recession,” Strauss said of economists. On the other side of the equation, “They’re not talking about an exceptional economy, either.”

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