Intelligencer staffers Josh Barro and Benjamin Hart chat about possibly ominous economic data and whether it’s worth freaking out over.
Ben: Last time we spoke, you were a little more sanguine about the state of the economy than you had been. It seemed that threats of a recession over the next year or so were fading. Now, once again, we see what appear to be warning signs. It feels like there’s a certain amount of whiplash going on here — we keep seesawing between “Everything looks good” and “We might actually be screwed soon.” Are economic signals normally so subject to change, or is this a measure of the volatility of the times?
Josh: I would contest the notion that we are whipsawing. The market indicators change and political circumstances change and a recession becomes more or less likely. But at all times, it has been more likely than not that growth will remain positive over the next, say, year to 18 months at least.
For example, consider the yield curve. One thing Ernie Tedeschi, a former Treasury Department economist who’s now at the investment firm Evercore, told me when I was writing my story yesterday is that we’re in a situation right now where the fundamentals call for a pretty flat yield curve. The Fed has been pretty clear that it’s unlikely to change rates in either direction in the near term, and there is a long-term trend that the curve doesn’t slope upward as much as it used to, absent expectations of particular future changes in short-term rates. So if the curve is about flat due to fundamentals, it takes only small shifts in the surrounding circumstances to change it from a little bit upward sloping to a little bit inverted.
And so it keeps changing back and forth, and people interpret that as “Oh, things are good now” or “Oh, things are going to hell now.” But the underlying changes weren’t that big. People are too focused on the sign and not enough on the magnitude.
Ben: Right — people are comparing it to a similar-looking pattern in 2007, just before all hell broke loose. But many of the economic fundamentals between now and then are not so comparable, correct?
Josh: I don’t think they’re comparable. One advantage of the slow-going recovery we have had since 2009 is it’s made it hard for the economy to overheat like it did in the mid-aughts.
Ben: You have, however, written this week that the trade war, which has been more of an annoyance for the U.S. economy than a real crisis, is looking more like a threat as the stakes have been raised by both the U.S. and China. How much pain do you think President Trump is willing to withstand if this really starts to cut into a central advantage of his going into 2020, which is the strong economy?
Josh: I don’t know. I think one issue is that the president has real policy goals here beyond just “looking tough.” And I think he and his team were genuinely surprised when the Chinese walked back concessions they appeared willing to make a few weeks ago. He’s also right that China has more to lose in a trade war than we do, so that’s a reason for him to think his negotiating position is strong and if he fights, he’ll get concessions he wants. So I think those are reasons for him to fight harder and endure more pain than he usually would.
I also think a sign he’s hunkering down is something I wrote about two weeks ago: He has backed off some of his other global trade disputes in a way that suggests to me he realizes the fight with China is going to be harder than he thought and he needs to keep some powder dry. He took off metal tariffs on Canada and Mexico he’d been reluctant to lift. And he delayed, for now, global tariffs that he clearly wants to impose on auto imports. That suggests to me he’s gearing up for a prolonged dispute with China and trying to reduce both the political and economic costs imposed by non-China protectionist moves. But he’s also very sensitive to the stock market, and I don’t know if he’ll lose nerve if the reaction continues to be negative.
Ben: Beyond the yield curve and the trade war, is there anything else you see as particularly concerning at the moment?
Josh: As is often the case, you can pick the economic indicators to get the answers you want. There have been some bad numbers in the past month, particularly a very low number on manufacturing output. Retail sales and home purchases were also weak. On the other hand, employment indicators and consumer sentiment still look fine. This is a mild version of the split we were looking at in the winter: better employment data than output data.
The advice I got at the time from Jason Furman, who ran the Council of Economic Advisers for Barack Obama, was that the employment data tends to be more reliable than the output data. But we’ll have a new jobs report to look at next Friday. Maybe it will change. It’s possible the bad manufacturing number was driven by trade-war fears. Tariffs can be expected to have much bigger effects on the manufacturing sector than on the economy as a whole.
Ben: You mentioned at the top that you would dispute this notion that we’re seesawing between predictions. Many journalists (myself included) are not overly financially literate. Do you think there’s generally too much “Recession is coming!” sensationalism in the press, or is this just a by-product of the topic’s being inherently rather difficult to grasp?
Josh: I do think there is too much sensationalism. I think in some cases it’s driven by a sense that President Trump “deserves” a recession, either because he has pursued some identifiably bad economic policies or because he is a bad person generally.
I also think there is a general bias toward negativity. But also, something like a 20 percent risk of a recession is still important. It’s worth focusing on downside risks. They matter, and we should be discussing, for example, whether the Fed is doing the right things to mitigate them. But I do think more of the coverage ought to say that warning indicators that we (appropriately!) watch are not yet saying a recession is imminent or even likely.
Ben: Readers: A recession is not yet imminent or even likely.