During a speech at CPAC last week, President Trump blamed a strong U.S. dollar and interest rate hikes by the Federal Reserve for hurting the economy. Meanwhile, most "experts" opining on where economic growth is headed say the risk of recession depends on his actions. The reality is that, just like everyone else, the president has to bow to the power of the business cycle.
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The reason that so many economic headlines seem dependent on the president is salience bias, where people focus too much on information that’s more prominent while ignoring information that’s less so. It’s human nature to focus on cues that are unusual, surprising or vivid, while glossing over obscure data that can be more informative. This isn’t just a Trump phenomenon; it’s true for Republicans and Democrats alike.
Yes, Trump’s policies undoubtedly impact the global economy. But none of that makes a material difference to the timing of the next recession. Indeed, more than most realize, the economy’s cyclical drivers can move in ways that seems out of step with the latest policy developments.
Some headlines declare that a recession is looming, while others say it’s years away. These are really just guesses passed off as forecasts.
For example, most CFOs expect a recession this year or next -- and depending on how the stock market has done in recent weeks -- Wall Street ratchets up and down its recession concerns. Far more dependable are well-researched leading indexes that show which direction cyclical drivers are pointing and reveal when a recession is looming.
Because most economists think recessions are caused by shocks whose timing is often unpredictable, the common wisdom is that the timing of the next recession is at best a guess. That’s why they often focus on what shocks Trump administration policies might produce.
Approaching recessionary window of 'vulnerability'
While our research excludes guesses about what Trump will do next, or when the next natural disaster will strike, or precisely when the market will tank, it does offer clear answers as to the economy’s vulnerability to potentially recessionary shocks from any quarter.
Today, our research shows that the U.S. economy is approaching a recessionary window of vulnerability. But it isn’t yet in that window, so the economy remains relatively resilient to shocks. Therefore, while our lonely forecast last year of a cyclical slowdown in growth has now proven correct, it’s premature to conclude that a recession is imminent.
Our track record isn’t perfect, but we have been consistent in making some of the most impactful predictions in recent history. We made a timely U.S. recession call well ahead of the Lehman Brothers collapse. We were then virtually alone early the next spring in correctly predicting the end of the Great Recession in real time.
Lakshman Achuthan and Anirvan Banerji are the co-founders of ECRI, a New York-based, independent risk management consultancy dedicated to studying and interpreting the nature of global business cycles.