Why a 2019 Recession Is Unlikely

Jack Sacks '20

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In spite of the volatility of U.S. stocks in recent months, scrutiny over the Federal Reserve, and seemingly endless buzz about the potential onset of a recession, the prediction that the U.S. is headed for a 2008-esque collapse is misguided and overstated on many fronts.

A recession, defined as a fall in gross domestic product in two successive quarters, would require an amalgamation of failures in order to become as egregious as 2008. A financial crisis, when long term assets suddenly appear subprime or unlikely to be able to pay back their creditors, is the first step. In 2008, the crisis ensued from subprime mortgages and collateralized mortgage backed securities issued by companies like Fannie Mae and Freddie Mac, whom the government took under conservatorship in September of 2008 in an attempt to mitigate the disaster. A similar chain of events occurring in 2019 is far-fetched at best.

Based on Federal Reserve data, in fact, household finances are steadily improving. Over the past four quarters, real estate equity and financial assets are both up by almost ten percent. Moreover, banks are holding on to significantly more capital than assets relative to 2008, clearly attempting to steer clear of another financial crisis. Even though stocks have risen steadily for a large part of the last three years, rendering some concern, houses are not being overbuilt relative to population growth, unlike 2008. Because of this, housing is unlikely to create a substantial drop off in aggregate demand.

Nevertheless, the general public is apprehensive. Why? Most commonly, politicians and the general public alike fear the power of the Federal Reserve. Thematic in President Trump’s tweets in recent times, criticisms of Federal Reserve action loom large in current American economic culture. As the Fed continues to raise interest rates in an attempt to cool off the economy, many fear that this will render significantly less investment and subsequently a recession.

As seen in 2008, it is difficult to predict whether the Fed has gone too far until the economy truly escalates out of control. Treasury Secretary Hank Paulson wrote in his memoir, On The Brink, that it was difficult to see the Fed and other subsidiary banks’ mistakes until the economy directly felt the effects of the recession. Considering the opposite is occurring now, and no housing bubble is looming, it is difficult to confidently predict a recession caused by a Fed miscalculation. Another disaster is necessary to catalyze a crisis, causing critics to point to President Trump’s trade wars.

Cutting exports to China as result of egoism in trade talks would be damaging, but considering United States net exports have been negative for some time anyways, the result would not likely be catastrophic. However, the contingent effects of lessened imports from China would certainly inflate the American economy and wreak havoc on the capital goods market. Even so, given the import effects of the trade talks have been limited thus far, it is hard to say that any sudden disaster is imminent with China. Furthermore, the new USMCA makes commerce with Canada and Mexico essentially disaster-proof, mandating policies that prohibit major drop-offs in imports and exports.

Without some disaster, such as collapse of import and export markets or a housing bubble, to complement mistakes by the Fed, it is difficult to forecast a recession in the coming year with absolute certainty. Even with a 2008-esque catastrophe being unlikely, managing recessionary risk, a key facet of Fed and Treasury policy since 2008, is an endeavor that consumers should take on as well.

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Why a 2019 Recession Is Unlikely