May 26, 2019

Economic View: You Never Know When a Recession Will Sneak Up on You

The very biggest drops in confidence in the last 40 years came from major events like the collapse of Lehman Brothers in 2008 and the popping of the internet bubble, which led to recessions, but close on their heels were episodes of government dysfunction, which did not necessarily culminate in recessions. These include the debt ceiling crisis of 2011 and the government shutdown of 2013.

The most recent shutdown seems no different in this respect. In the last survey before the government reopened, consumer confidence fell the most it had in almost three years, and confidence among chief executives dropped to the lowest level in seven years. The shutdown doesn’t seem to have caused a recession, but it would be unwise to celebrate.

Another government shutdown could spiral into something far more damaging than the small decline in workers’ share of the economy that the simple math suggests. An escalating trade war with China could ignite a recession, even if the numbers show that trade isn’t a large share of the United States economy. These events just need to spook consumers or businesses into putting off spending, and then more dire consequences can start to snowball.

So let us all hope for excellent jobs numbers in the months to come, along with a rebound of G.D.P. growth. That may well happen, but it would be a mistake to be overconfident and assume that the economy will automatically weather a major policy blunder. If something scares people enough, it can start a recession, and you probably won’t know until it’s too late.

That’s because recessions are hard to recognize at the start. Looking back, for example, we know that a recession officially began in April 2001, yet scarcely anyone understood that then. In June 2001, only 7 percent of economists in the monthly Blue Chip survey believed a recession was underway. In the months before that 2001 recession began, only 16 percent of economists expected that a recession would start within the next year. Now, 25 percent of economists in a Wall Street Journal survey say they expect a recession within the next year, and anxiety seems to be growing.

The great pitcher Satchel Paige once advised: “Don’t look back. Something might be gaining on you.” Had he been an economist, he might have added, “And don’t start a trade war, either.”

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