By Dr. Mike Walden
My late mother used to tell me, “Be careful what you wish for; it may come true.” Her advice has relevance for today with all the talk about the possibility of an upcoming recession. I’m not implying people are wishing for a recession. The concern is that if we worry so much about a recession, can we actually talk ourselves into one. That is, changing my mother’s words slightly, do we need to “be careful what we talk about; it may come true.”
As usual, economists are divided on the likelihood of a recession happening anytime soon. A recent survey of business economists put the chances of a recession in the next two years at about one in three. Others, like CEOs (chief executive officers), think it is much higher.
Economists are trained to think recessions are caused by fundamental factors, like households being over-extended with debt so they curtail spending. This certainly was the major factor behind the Great Recession of 2007-2009.
Or, recessions can originate on the business side. For example, the two recessions in the 1970s were mainly caused by big run-ups in oil prices. At the time, oil was a much more important source of fuel for industry. So a big jump in oil prices caused a surge in retail prices. With no commensurate increase in workers’ incomes, households cut back on spending and plunged the economy into recessions.
One reason many economists today are not worried about a recession is the fundamental causes like high debt and rampant inflation don’t exist today. As a result of historically low interest rates, debt payment loads for households, businesses, and even government are at low levels. Also, in major part due to the large increases in U.S. oil production, oil supplies are ample and prices are moderate.
Still, economists have long recognized that more than fundamental economic factors can stir up recessionary fears. Psychology and feelings can play a big role. Indeed, it is somewhat ironic that a discipline that deals so much with observable facts (economics) can be related to a discipline based on more subjective evaluations (psychology).
Economists who lived through the Great Depression of the 1930s realized the role fear could play in the economy. If households believe the future will be worse than the present, they will save money to prepare for that challenge. In particular, households will refrain from borrowing to buy “big ticket” items like homes and vehicles.
Businesses will react to fear in a similar way. With households spending less, businesses will cut costs by reducing their labor force and delaying upgrades to their equipment and technology. These actions reinforce the fear felt by households and send the economy spiraling down even more.
How does fear about the economic future develop? Part is through observation of facts. You see your neighbor lose her job, or you read about the closing of a company. But part of it may be through stories you hear or read, some of which could be inaccurate. Also, as most of us know, as stories are passed from person to person, they can become embellished and overstated.
The Nobel Prize-winning economist Robert Shiller, who was one of the few to forecast the severity of the Great Recession, analyzes the impact of stories about the economy in his new book Narrative Economics. He argues the effect of stories and perceptions may actually be greater now than in the past due to technology.
Today people have a multitude of sources for information about the economy. Stiff competition between these sources for our attention sometimes means stories will be eye-catching and provocative. I’ve already seen numerous stories about how to prepare for the coming recession, as if it’s already been decided a recession is near.
Modern technology also means stories receiving lots of “clicks” or “likes” can “spread like wildfire” – the term used in my day – or “go viral” – the term used today. This means before something is analyzed, verified and reconsidered, it can be seen and accepted by millions – maybe tens of millions – of individuals.
Now let me return to my opening question – can we talk ourselves into a recession. I think the answer is a “qualified yes”. The qualification is there needs to be an ignitor. That is, there needs to be some real trouble in the economy to start the worry. Concerns about recessions don’t just appear out of thin air. Once some valid worry does appear, widespread talk about it can “fan the flames” and potentially make the recession come sooner or cause it to be deeper.
While debt loads and inflation aren’t worrisome today, there are some trouble spots in the economy. Trade disputes – especially with China – are at the top of the list. Regardless of whether the U.S. positions on the disputes are worthy, the fact is the trade disputes are curtailing profit-making exchanges as well as supplies of important inputs for many of our businesses. The disputes are costing the economy some growth.
Fear about the unknown is a natural instinct. The objective should be to evaluate how real and important any fear is. For the economy, this means you must decide what to look at and who to listen to for projections about where we’re headed.