Judging by incoming calls and emails, investors are becoming more concerned about the possibility of recession. The flatter yield curve may be partly to blame, but there are growing concerns about the impact of the president’s trade wars and Fed rate increases have created some anxieties. These queries seem odd right now. There are no signs of a recession on the immediate horizon. As judged by economic forecasters, the odds of a downturn beginning in 2019 or 2020 have risen somewhat, but a recession, while possible, is not the likely scenario. However, fading fiscal stimulus, a scarcity of labor, tighter monetary policy, and trade policy disruptions ought to lead to slower growth in the quarters ahead.
Following brief remarks to business leaders the day after the FOMC meeting, Fed Chairman Powell was asked about the likelihood of a recession. “There’s no reason to think that the probability of a recession in the next year or two is at all elevated,” he said.
What is a recession? It’s not two consecutive quarterly declines in Gross Domestic Product. Rather, the National Bureau of Economic Research’s Business Cycle Dating Committee, which determines the beginning and ending dates of a recession, define it as “a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.” In making its decisions, the BCD focuses on nonfarm payrolls, industrial production, real business sales, and real personal income.
Nonfarm payrolls have continued to advance at a strong pace, well beyond what’s needed to absorb new entrants into the labor market. Job gains have driven growth in aggregate wage income, both on a nominal (current dollar) and real (constant dollar) basis. Average wages have been about flat adjusting for inflation. Industrial production continues to trend higher. Real business sales have continued to improve. These gauges suggest that we are nowhere near a recession.