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Are We Headed For Another Recession?

This is the first edition of In Real Terms, a new column analyzing the week in economics news. We’re still experimenting with the format, so tell us what you think. Email me or drop a note in the comments.


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Sure, last week’s jobs report was great, gas is cheap and President Obama says the U.S. has “the strongest, most durable economy in the world,” but don’t let any of that fool you: We’re careening headlong toward another recession. Or so fret Robert Samuelson and Larry Summers (separately) in The Washington Post and Alan Murray in Fortune. And don’t expect it to stop there. With the stock market off to its worst-ever start of a year, recession-prognostication looks to be a growth industry. (Economists at the Royal Bank of Scotland last week cheerfully recommended that investors “sell everything.”)

The doomsayers tend to fall into two broad (and overlapping) categories. On one side is the “it’s about time” caucus, which argues, essentially, that it’s been six years since the last recession ended, so we’re due for another one. As evidence, supporters of this position note that the average post-World War II economic expansion has lasted less than five years; in a recent speech, Summers offered a more technical version of this argument that reached pretty much the same conclusion.1

As back-of-the-envelope calculations go, this is all well and good — it’s important to remember that another recession is bound to come eventually and that “eventually” could be sooner than many people think. But it’s not clear why this analysis should mean a recession is more likely now than in, say, five years. Over the past 70 years, we’ve had an expansion that lasted 12 months and one that lasted 10 times that long; there’s no good way to know which end of the spectrum we’ll fall on this time.

The second category of doomsayers argues that there really are reasons to worry right now. Or at least one reason: China. China’s stock market tumbled to start the year, and, depending on whose interpretation you believe, its economy is either gradually slowing or falling off a cliff. The turmoil is reducing Chinese demand for everything from oil to luxury goods and is threatening to destabilize global financial markets.

The question is how much of a threat China’s struggles pose to the U.S. economy as a whole. The answer is clearly not “none,” but it might well be “not much.” U.S. exports to China are relatively modest, and our financial systems aren’t particularly interconnected. A broader global slowdown would surely pinch, but the rest of the world has been struggling for more than two years now and the U.S. recovery has stayed on course.

None of this is to say that a recession isn’t coming. If there’s one truism in macroeconomics, it’s that we’re really bad at predicting recessions. But that failure works in both directions — a vocal subset of economists has been forecasting a collapse for six years. One day, they’ll be right. But I’m guessing that day won’t come in 2016.

The State of the Union

Most of what Obama said about the economy in his final State of the Union address sounded pretty familiar: The job market is improving, the minimum wage should be higher, big corporations should pay their workers more. Buried in the familiar talking points, though, was an interesting nugget: Obama wants to make it easier for workers to change jobs. The Affordable Care Act already took one step in that direction: It made more readily available health insurance that isn’t tied to a specific job, something that economists have long liked about the law but that Obama has rarely emphasized. In Tuesday’s speech, Obama proposed making it easier for workers to take retirement savings with them when they change jobs. He also called for a “wage insurance” program to encourage people to get back to work after a job loss. (Obama hasn’t provided details, but most proposals would help fill the financial gap for workers who take lower-paying jobs after being laid off.)

All of that would be nice for workers, but what makes the proposals significant economically is that Americans are changing jobs less often than they did in past decades. This decline in “labor-market dynamism” worries economists because job changes are important to maximizing productivity in the economy (the idea is essentially that everyone moves around until they find the “right” job). No one is really sure why dynamism has declined, and Obama’s proposals aren’t detailed enough to judge whether they would have much effect. But it’s significant that he’s talking about the issue at all.

The state of our counties

Speaking of the state of our union, the National Association of Counties released a report this week claiming that just 7 percent of U.S. counties have fully recovered from the recession. Color me skeptical. The recovery has been disappointing in many ways, and there are large swaths of the country where it is far from complete. But the association’s definition of “full recovery” is extreme. To qualify, counties must have returned to 2007 levels on four indicators: jobs, the unemployment rate, economic output and home prices. But there’s no reason to think home prices will return to housing-bubble levels anytime soon — or to hope that they do. And while jobs and unemployment are more reasonable indicators, it’s odd to use 2007, the peak of the last cycle, as the benchmark. 2005 was a pretty solid year; maybe we should aim for that.

Number of the week

Oil prices on Tuesday dipped below $30 a barrel for the first time since 2003. Prices picked up a bit by the end of the day, but analysts don’t expect the rebound to last long. Morgan Stanley on Monday joined Goldman Sachs in predicting that oil will hit $20 a barrel, and British bank Standard Chartered said it could go as low as $10. This is where I remind you that no one has any idea where oil prices are headed. Just a few years ago, Goldman was calling for $200 oil, and its arguments sounded just as logical then as its $20 forecast does now.

Quoted

“Adding in some females changes the dynamic quite a bit.” — Andrew McDonald, of the corporate communications firm LifeSci Advisors, in this truly remarkable Bloomberg story on (the lack of) gender diversity in the biotechnology industry. LifeSci’s solution: Hire models to attend industry mixers.

Check out our live coverage of the Democratic debate.


Special shoutout to reader “The Hunt,” who suggested the name for this column, and thanks to all the readers who weighed in with suggestions. (Our original favorite, Free Lunch, was so good that it was already taken; check out Martin Sandbu’s daily econ newsletter by that name in the Financial Times.) And remember to let us know what you think of the column!

Footnotes

  1. Summers noted that once an economic expansion has lasted more than five years and the unemployment rate has dropped below 6 percent, the U.S. has entered a recession within 18 months about half the time. We’ve been in that situation for 15 months now.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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