Is the U.S. headed for a recession?
With so many mixed indicators about the economy, The Well asked economist Gerald Cohen for his forecast.
Every day, there seems to be a new headline with a conflicting forecast about the American economy. Here’s a recent sampling: “Why the countdown to a recession begins now” (Market Watch). “U.S. economy returns to growth.” (New York Times). “All the economic experts are at a loss on the eve of the midterms: ‘The data is all over the map’” (Forbes).
What’s the average person to think about the financial future and how to prepare for it?
For advice, The Well turned to Gerald Cohen, chief economist at the Kenan Institute of Private Enterprise. Cohen also served as deputy assistant secretary for macroeconomic analysis at the U.S. Department of Treasury during the Obama Administration.
In a time of mixed messages, sometimes the way we look at the data can be just as important as the data itself, Cohen said. A lack of confidence in the economy can be a self-fulfilling prophecy.
“I’d say the biggest fear that I have is that we talk ourselves into a recession. That confidence channel is really important,” Cohen said. “If businesses say that we’re about to have a recession, then they’re going to hire fewer people. If households expect they’re going to have a recession, then they’re going to buy fewer goods. And both of those things are self-reinforcing.”
Do you think the U.S. is headed for a recession?
I think that there’s a 50-50 probability of a recession. I’m on the fence. And there are a number of reasons.
Positive economic indicators:
- My favorite economic indicator is thespread between 10-year treasuries and three-month treasuries. (Note: Investors usually get more interest for long-term bonds, but when the situation is reversed, that’s called a “yield-curve inversion,” an indication that investors expect economic growth to decline soon, probably within a year. For a full discussion of this indicator, read Cohen’s“This Reliable Economic Indicator Is Still Flashing Green.”) When that spread turns negative, that’s a definitive sign of a recession. And it’s not there. The yield curve is flirting with inversion, but it’s not there yet.
- The fact thatemployment is just still so strong. One of the key findings is that companies are looking for employees and that there’s a significant labor shortage. And as you’re about to enter a recession, people normally don’t talk about labor shortages.
- Households still have a very high stock of savings, by my estimate, about $2 trillion that they built up over the pandemic. And again, that means that consumers are likely to keep spending even amidst a slowdown.
Negative economic indicators:
- The Fed is raising interest rates. They’re doing it because it’s the only thing that they can do to dampen demand. And what they’re trying to do is get demand and supply in balance so that the inflation will come down. But by raising interest rates and by being so aggressive, they make the risks of a recession higher. And if inflation doesn’t come down, the Fed is going to be forced to raise rates even higher.
- In residential construction, you are starting to see someactual employment numbersthat, although they aren’t declining, aren’t great. There are areas where the higher interest rates are starting to put pressure on, and that’s the reason to be nervous.
- Andconsumers could spend less. Even if you have a stock of savings, if you end up losing your job, your spending patterns would definitely change.
How worried should the average person be about the possibility of a recession?
I think there are reasons to be worried. But let me be very clear. Nobody has a crystal ball. Nobody knows what the future is going to be like. Economists are very bad at forecasting recessions. Where I can add the most value is not forecasting, but saying, “What do current conditions tell us?” This is the dichotomy that I see — that current conditions are in many ways very strong, but there are reasons to be quite nervous. If we start to get significant job declines, then it’s a completely different ballgame.
What’s the best way to prepare for a recession?
The economist’s mantra is “everything in moderation.”
- Have your financial plan in orderand stick to it. Don’t overextend yourself.
- Don’t over-react to market declinesand market volatility. That’s the worst thing you can do. Selling low is a big mistake.
- Don’t be a “quiet quitter.”Treat your job as your source of income and act accordingly.
- Be a bit less pickyif you’re looking for a job. Often the last one in is the first out in terms of employment. So you don’t really want to be the last person in a job.
