Why Economists Are Betting a Recession Won’t Happen

I stole that headline from the Wall Street Journal (subscription required).  I’ll repeat their reasons, but first give some perspective and then a sixth reason added on top of theirs.

Perspective on recession:  Recession is not the norm; growth is the norm.  So the burden of proof is on those who forecast a recession.  I liken recessions to car accidents.  If you study any particular one, you can see that it was avoidable.  But in the aggregate, we know that we’ll get some.

Now let’s roll through the Journal‘s five reasons why not:

1. The Fed is on the case.
2. Strong global growth is propping up the U.S. economy.
3. The economy is still creating jobs, supporting incomes.
4. The housing downturn’s pain will continue, but has already done much of its damage to growth.
5. Government spending remains strong.

In my interview with Mark Thoma regarding business cycles, he says that when he’s considering the possibility of a recession, he looks for a story.  That story will vary from time to time.   Right now the most likely story that puts us into recession is a credit crunch:  the subprime mortgage problem leads to a cutback in credit availability outside of real estate.  As I mentioned in a recent post, there’s no evidence that this is happening.  It’s something to worry about, for sure, but as of today, it’s not happening.

However, the risk of recession is high enough that businesses and families should do some contingency planning.  Use the google search bar on this blog to find my earlier posts about planning for recession.