Ben Bernanke got a big laugh from economists in Atlanta on January 4. A few minutes after Janet Yellen said, “I don’t think expansions just die of old age,” he replied, “I like to say they get murdered.” All right, not that funny. But the nerdy repartee between the past two Federal Reserve chairs at the annual meeting of the American Economic Association reveals how central bankers think about recessions—and says something about how likely it is that the US will tip into one over the next year.
The open secret of the economics profession is that its practitioners don’t have a theory for why expansions die. Or rather they have several theories, each of which contradicts the others and none of which is fully supported by the data. Because economists don’t know why recessions start, they can’t predict when one will start.
The likelihood is that the US economic expansion that began in June 2009 will reach its 10th birthday this summer and roll right on, becoming the longest US period of uninterrupted growth since at least 1854. Economists surveyed by Bloomberg see only a 20 per cent probability of recession over the coming 12 months. Nothing on the horizon shouts “recession.”
Then again, without a good theory of the business cycle, no one really knows. What we do know is that economic growth is fuelled by the confidence of consumers, businesses, and investors. Lately, that confidence has been sagging. A spike in fear that the expansion will die—either of old age or from murder most foul—could become a self-fulfilling prophecy. “Things can turn quickly because so much of this is animal spirits,” Kristin Forbes, an economist at Massachusetts Institute of Technology’s Sloan School of Management, said at the economics conference in Atlanta.
It seems like a strange time for anyone to worry about a recession. On January 4 the Bureau of Labor Statistics reported that the US economy created 312,000 jobs in December, half again as much as the monthly average over the past five years. Ordinarily such a burst of hiring would drive down the unemployment rate, which has stayed below 4 per cent for the longest period since the Soaring Sixties. The only reason it actually rose a bit—two ticks, to 3.9 per cent—is that the hot pace of hiring drew more people into the labour force. That’s exactly what you want to see: discouraged workers, premature retirees, and people out on disability all giving the job market another try. “This is a much better, more optimistic picture ,” White House economic adviser Larry Kudlow said in a Bloomberg Television interview.
It’s not just the job market that’s booming. GDP grew at a 4.2 per cent annual rate in the second quarter of 2018 and 3.4 per cent in the third, and it’s estimated by economists surveyed by Bloomberg to have grown 2.6 per cent in the just-ended fourth quarter. Those are good numbers when you consider that based on population and productivity trends, the Fed estimates that the US economy’s long-run growth potential is only around 1.9 per cent a year.
Despite that, investors don’t share Kudlow’s confidence. That’s seen most clearly in the stock market, where the S&P 500 is down 11 per cent over the past three months. Inflation expectations have fallen, a sign of lack of confidence in economic growth. The Business Roundtable’s index of the economic outlook of big-company chief executives, while still above its long-run average, has fallen for three straight quarters.
Consumers are the one group that remains solidly confident, maybe because the share of Americans surveyed by the Conference Board who say jobs are hard to get is the lowest in 18 years. Holiday spending was strong. But even consumers have their limits. Auto sales have been flat since 2015. It’s worth bearing in mind that a lot of consumers are investors, too, so their stock portfolios matter to them along with their salaries. One reason for the jitters is that a lot of people don’t agree with Yellen. They think recessions do die of old age. They think good times lead inevitably to excess: Companies overproduce, consumers overspend, and balance has to be restored. In the debt cycle theory of the late American economist Hyman Minsky, a theorist of financial fragility, easy lending leads to foolish investments, which lead to defaults and a sharp drop in lending that kills growth.
Even if Yellen is right that this expansion won’t die of natural causes, it could be murdered, as Bernanke pointed out. The No.?1 suspect would be his own ex-employer, the Federal Reserve. The Fed has raised interest rates nine times since the end of 2015 to slow loan growth and keep the economy from overheating, which would push inflation above its 2 percent target. The risk is that in trying to restrain inflation, the Fed will overdo it and choke off the very expansion it’s working so hard to sustain.