November 12, 2019

Recession Fears Are Receding. That Doesn’t Mean They Were Unfounded.

And while the manufacturing sector remains in bad shape, the evidence so far points not so much to a free fall as a rough patch. More promising, the troubles in manufacturing have not spread to the services and consumer-focused portions of the economy, which are much larger.

One way of looking at this narrative of the last few months would be to say this proves that everyone was overly jittery, that the news media, Wall Street and the Federal Reserve overreacted to a few inconclusive data points.

That’s not a crazy assertion. Throughout this decade-plus expansion, there have been periodic bursts of pessimistic sentiment, times when a recession seemed to loom, and thus far all of them have proved false. So you could chalk up this episode as one more example, with the lesson being that the American economy is dynamic and robust enough that it will probably keep chugging.

The problem with that narrative is that it omits the circularity involved in economic policy. It was the yield curve inversion and softening of global manufacturing indexes that caught the attention of policymakers, and their moves have helped ease recession fears.

Since midsummer, the Federal Reserve has cut interest rates three times, for a total of 0.75 percent. It was an implicit acknowledgment that interest rate increases in 2018 had pushed rates in the United States beyond what it could handle in light of global deflationary forces.

There were people, both inside and outside the Fed, who argued that these moves were unnecessary in a time of near-full employment, and that they would lead to financial bubbles and other risks down the road. Time will tell whether those warnings are right. And maybe the rate cuts weren’t actually necessary.

But what we do know is that the yield curve is now uninverted. Longer-term yields, while back to their early August levels, are still considerably lower than they were earlier in the year. It’s not that the global economic outlook has improved all that much; it’s just that the Fed has now adjusted United States interest rates to a level that should allow the domestic expansion to continue despite that global slowdown.

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