Economy: Why A Nearby Recession Is Highly Unlikely

(Drivebycuriosity) -  There is a lot talk about a nearby recession. The usual high priests of doom & gloom are calling a recession for 2020 or even for this year. I think the recession callers will get wronged as they did in 2015 & 2016 (driveby). I will describe below why a recession is highly unlikely this or next year.

The global economy is getting a lot tailwinds from cheap commodities including copper, steel & aluminium. The  price of oil (Brent Crude) dropped about 30% since last autumn. Oil costs about 15% less than a year ago which translates into cheaper gasoline. Today Americans pay about 12% less at the gas pump than last year. Consumers have more money in their wallets to spend for other goods & services - which is boosting consumer spending - and companies have lower costs. 

Former recessions were often caused by spiking oil prices. In 200/08 the price of oil tripled and jumped to $146. According to Prof. James D. Hamilton, University of California, San Diego the oil price spike turned the economic slowdown into a severe recession (econbrowser). Today the price of oil hovers around $60 - far below the danger zone. In 2011 & 2012 the global oil price (represented by Brent Crude) floated around $120 without causing a recession in the USA (brent-crude). So, the price of oil has to rally more than 100% to become a serious thread to the economy. The recent sharp drop of oil prices and Opec`s problems to hike the oil price again, thanks to the climbing US production and fracking, reduce the risk of an oil price induced recession considerably. Rising oil prices also would encourage more oil pumping and would extend the current oil glut.

( macrotrends )


Since World War II recessions were also often caused by the Federal Reserve who responded too late to rising inflation rates (wikipedia). Then the Fed needed sharp interest rate hikes to break the inflation mentality. This risk is also very low. The Fed already hiked her interest rates 9-times and there a no signs of an accelerating inflation. In December the US inflation rate (consumer prices) dropped to 1.9%. The so-called core inflation rate (with oil & food) was 2.2% (calculatedrisk). Inflation rates will stay constrained because oil prices are getting tamed by the rising US oil production. Other prices are curbed by the Internet, automation & other aspects of the technological progress which are reducing the costs of producing & distributing stuff and therefore curb inflation (Amazon effect).

We are also far away from an overheating economy which could lead to over-investment. The US economy is grinding along with a slow but sustainable speed and grew about 2.8% in the fourth quarter according to the Federal Reserve Bank of Atlanta (frbatlanta ). There is no bubble which has to pop. Banks are solid as their climbing profits demonstrate. Yes, there are signs of a labor shortage, but this is partly compensated by automation.
 
And there is another tailwind: US companies are still benefiting from the tax reform & ongoing deregulation. Both changes are encouraging them to invest more. I think that a combination of cheap commodities, strong consumer spending, relatively low interest rates, regulation & taxes will keep the economic expansion alive for a long time.

BTW Economic expansions don´t die of old age! Last summer Australia’s economy entered its 27th year without a recession (reuters ). The Australians broke a record, which was hold by The Netherlands, which didn`t have a recession between 1982 and 2008. I don´t see a reason why the US should be unable to follow these examples.