Turmoil in the markets has renewed fears that the US did not escape history after all, that a hard landing — a recession — is coming. Whether this is all a blip from a rising yen or a justified reaction to an actual weakening of the US economy is still unknowable. But there are reasons to believe even a hard landing wouldn’t be so hard.
To be clear, a recession is never good. People lose their jobs, companies go out of business, assets fall in value, uncertainty spreads. But some recessions are worse than others. The 2001 recession was fairly mild and short, with the unemployment rate peaking at 6.2%. In 2008, it rose to 10%, while households saw much of their wealth destroyed and the recovery dragged on for nearly a decade.
Three things determine how bad any recession will be: what the economic conditions were going in, what caused it, and what the policy response is. It’s worth taking each in turn.
The current economy is in pretty good shape. In contrast to 2008, households are not over-levered. They are more capable of weathering a contraction, or even a period of joblessness. If there were a recession, demand would fall — but not crater. Corporations are not excessively levered either, at least when it comes to public debt markets.
This relatively low debt level — much of it locked into low rates — suggests a fair amount of resilience in the economy, even if economic conditions worsen.
Granted, there are serious long-term sources of weakness: too much government debt, an economic policy insufficiently focused on trade and growth, political instability and a broken immigration policy. But unless America is unlucky, it has several years before these have a big impact on the economy.
How about the second factor: What causes a recession? Sometimes it is a big supply shock, such as shutting down the economy for a pandemic or a huge spike in the cost of energy — neither of which is expected. In the 20th century, some recessions came from an overly tight monetary policy. And despite the complaints that the Fed did not cut last week, rates are still not that high by historical standards — and it is not clear that financial conditions are even tight right now.
