Is there a parallel between the economy before The Great Recession and now?
Published June 20, 2019
A trade war is raging, farmers are suffering, manufacturing and construction are slowing, the Federal Reserve has tightened credit, and the stock market is wobbly. Sound familiar?
These conditions can easily describe today’s economy. But the scary thing is they also describe the economic situation of the country in the late 1920s, at the onset of the Great Depression.
Is there a parallel between now and then? Are the ominous signs of a major economic downturn staring us in the face?
These are questions economists frequently worry over. Picking the time when an economy moves from growing to receding is perhaps the hardest forecast an economist is asked to make.
But also for non-economists, knowing if the economy is headed for growth or decline makes a huge difference for their decision-making. If growth is expected, businesses will continue to invest and expand, and consumers will continue to spend and borrow. If a recession is expected, both businesses and consumers will shift into reverse and curtail investing, spending, and borrowing.
So are we on the verge of a major economic debacle, or – to borrow a famous phrase – are the reports of a dying economy vastly overstated? Let me line up the arguments on both sides and then let you decode.
Let’s first look at the arguments for an upcoming recession. The current economic expansion began in June 2009, so this month the economy will have grown continuously for ten years. This is actually a record. While expansions don’t necessarily die of old age, just like people they can lose some of their vigor in their older years (just ask me!). We’ve already begun to see manufacturing – often viewed as a leading indicator - retreat somewhat. Also, with unemployment at a half century low, there’s concern we just don’t have enough jobless workers to take the new jobs needed to keep us growing.
Trade wars are a big concern. A trade deal with China now appears to be a way away – if at all – as both countries have recently announced new rounds of tariffs. The U.S had threatened tariffs on Mexican imports, but a deal was reached to avoid them. However, there are still unresolved trade issues with the European Community and Japan.
If these trade disputes are not resolved, ultimately new trade patterns would be developed and the U.S. economy could be fine. But these changes take time. Meanwhile, U.S. companies relying on exporting suffer, and U.S. companies and consumers buying foreign imports pay higher prices. Both impacts hurt the economy, perhaps enough to send it into a recession.
One way to evaluate the economic future is to look at financial markets, and doing so raises some concerns. A metric designed to determine if the stock market is overvalued indicates that, indeed, it is, and the overvaluation is the second highest in our history. Also, the recent decline in long-term interest rates relative to short-term interest rates has often been associated with a slowing, and maybe even contracting, economy.
Now let me go to the other side of the ring and look at the reasons supporting continued economic growth – that is – backing the idea of no imminent recession. First and foremost is the observation that both households and businesses are not overburdened with debt. Debt payments as a percent of income for households and as a percent of market value for businesses are almost at historic lows. This is important because excessive debt burdens have often been forerunners to recessions.
The labor market is still improving, with both total employment and worker compensation rising. And although official unemployment is quite low, there are millions of jobless, able-bodied individuals of working age who are still out of the labor force. If provided proper training in needed skills, these individuals represent a reservoir of future employees.
Inflation is not an issue, which means the Federal Reserve could push short-term interest rates lower and provide new confidence to the financial markets. In fact, recently the “Fed” made statements suggesting it may do just that.
To many economists – including this one – the trade wars are today’s biggest potential impediment to continued economic growth. The advantage for the U.S. is, that while international trade is important, as a percent of our economy it relatively much, much less important than in other major countries. This gives the U.S. the upper hand in trade negotiations, knowing that reduction in trade hurts the U.S. economy much less than it harms other economies.
For what it’s worth, all of the economic models used to predict recessions I’ve seen are not predicting a downturn this year. But a recent poll of economists showed a majority (60%) thought a recession would occur by the end of 2020. In contrast, a prominent economist who has studied movements in the U.S. economy his entire career recently said it was possible there would be continued economic growth through 2021. Consensus is not economists’ strong suit!
So, I’ve given you some facts and thoughts about the likelihood of a recession. Hopefully you’re better able to decide “yes or no” to a recession around the corner!
Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook, and public policy.