Is the US in danger of talking itself into a recession?

But some could and did blame his words.

Some Democrats and economists charged that Bush was intentionally driving down consumer and business confidence by exaggerating economic troubles^[1] to sell his tax cuts. Amid recession fears, he got his $1.35 trillion tax cut plan ^[2]through Congress that spring. He also got his recession. The economy slid into a relatively short and mild one in March 2001^[3].

Its unclear if all the negative talk from Bush helped pushed the economy over the edge. But a similar dynamic might be at play again now, with an increasing drumbeat of recession warnings^[4] fueled by high inflation and slower economic growth leading some analysts to worry that the country could be talking itself into a recession by spooking Americans into spending less.

Consumers may have this idea that things are worse than they really are, said Mahir Rasheed, a US economist at Oxford Economics, a global forecasting and analysis firm, noting that the underlying fundamentals of the economy remain strong. They might start to pull back on spending and businesses might start to pull back on hiring and thats where it could cascade into a self-fulfilling prophecy.

This time, its not the president talking down the economy. Instead, its some Republicans, economists, corporate executives, and financial analysts waving warning flags about a coming recession as the Federal Reserve aggressively hikes interest rates ^[5]to try to lower inflation. Theyve got a vulnerable audience in Americans scarred by the historically deep Great Recession more than a decade ago, traumatized by the pandemic, and now grappling with four-decade high inflation.

They also have a stronger case than Bush did in 2000, due to unique and worrisome dynamics in the economy. Russias invasion of Ukraine sent gas prices skyrocketing to record highs and rising interest rates triggered a steep stock market decline. This is driving down consumer confidence and may be causing Americans to think the economy is in more trouble than it actually is.

In an Economist/YouGov Poll ^[6]released last month, 56 percent of respondents said they believed the United States already was in a recession. Two-thirds of them said it is as bad or worse than the Great Recession from 2007-09, which is wildly wrong. In that disastrous downturn, the country lost 8.6 million jobs and the unemployment rate shot to 10 percent.

Most economists say the country is not in a recession right now, although that determination could change in the coming months as more data is analyzed. The unemployment rate remained at a historically low 3.6 percent in June after the economy added 372,000 jobs in another strong labor market performance, the government reported Friday^[7]. But all the positive statistics in the world wont make a difference if an even deeper decline in consumer and business confidence pushes an already slowing economy over the edge.

All the grim warnings could provide the final shove.

In typical times, confidence doesnt matter. It reflects whats going on in the economy, said Mark Zandi, chief economist at Moodys Analytics, an economics research and consulting firm. But at turning points in the economy, the causality flips and the sentiment drives economic decisions and pushes the economy, and that is the catalyst for ultimately going into recession.

Chuck Robbins, chief executive of computer networking giant Cisco Systems, cautioned his fellow CEOs at a World Economic Forum meeting in May that they needed to be careful about how they talked to each other about the economy since theyll be making spending decisions that help shape it.

I dont want to see us talk ourselves into a recession, Robbins told Yahoo Finance Live^[8]. If we go back and say We think theres going to be a recession, so slow down spending, then that ultimately could lead to it.

Consumer spending has remained solid despite high inflation, but it slowed in May, amid rising interest rates and more predictions of recession. Still, theres no sign people have started socking away money in anticipation of a recession, which suggests one isnt coming this year, said Robert J. Shapiro, a senior fellow at Georgetown Universitys McDonough School of Business and chairman of the economic advisory firm Sonecon.

I dont have any doubt that paying more for food and energy … is dragging down demand for some other things, but you still have this incredibly strong labor market and that means that every month you have hundreds of thousands of more people earning wages and spending more, he said.

Americans pay less attention to what theyre hearing and more to what theyre feeling, Shapiro said. Paying more for gas, groceries, and other purchases eats into Americans disposable income, and a declining stock market shrinks their retirement savings, all combining to make people feel poorer and worse about the economy.

Fed Chair Jerome Powell has said he thinks the central bank can bring inflation back down to normal without causing a recession, although he has acknowledged that executing such a so-called soft landing will be very challenging.^[9] President Biden has tried to stress the progress the economy has made on his watch, including record job creation, while acknowledging the pain people are facing because of inflation.

The US economy grew 5.7 percent in 2021^[10], the fastest pace since 1984. But in 2022, the picture turned much less rosy. The economy contracted at a 1.6 percent rate in the first three months of the year, and a closely followed tracker by the Federal Reserve of Atlanta estimates that it continued shrinking in the second quarter, though the governments official numbers wont be released until later this month.

A recession typically is described as two consecutive quarters of a shrinking economy, so the United States could be in one right now. Republicans have been hammering away on that point. Senate minority leader Mitch McConnell declared the country on the brink of recession in late June.

But the standard two quarter recession rule of thumb might not apply in todays highly atypical economy. The private, nonpartisan organization that officially dates recessions, the Cambridge-based National Bureau of Economic Research, analyzes a broader set of data to determine if there has been a significant decline in economic activity that is spread across the economy and that lasts more than a few months.

Many economists have said the first-quarter economic growth report didnt accurately indicate the state of the economy that is slowing but not stalling. A major reason for the contraction was a record high trade deficit^[11] that actually reflected the strength of the US economy compared to the rest of the world. With other nations still trying to recover from the pandemic, Americans imported more goods while demand was down for US exports, an imbalance that detracts from the growth calculation.

Strong demand for imports is not typical for a recession. Neither is robust job creation. So its possible NBER will determine that the United States is not in a recession even if the economy contracted again in the second quarter, which ended June 30.

If NBER does make a recession determination, it probably wont come for several months. In 2001, it took until November of that year for the organization to declare a recession had started in March^[12]. The recession technically ended in November 2001, but NBER didnt make that announcement ^[13]until mid 2003.

That doesnt mean that Bush was prescient in his warnings. NBERs announcement said it might have resisted designating the downturn a full-blown recession if not for the initial economic shock of the Sept. 11, 2001, terrorist attacks. That highlighted how a slow-growing economy can be pushed into a recession.

At the end of the day, a recession is a loss of faith by consumers who worry that theyre going to lose their jobs and pull back on their spending, a loss of faith by businesses who fear they cant sell what they produce and start laying off, Zandi said. You get into this kind of self-reinforcing negative psychological dynamic with everyone running for the proverbial bunker, and thats a recession.

Jim Puzzanghera can be reached at jim.puzzanghera@globe.com^[14]. Follow him on Twitter: @JimPuzzanghera^[15].

References

1. ^{^} exaggerating economic troubles (amp.washingtontimes.com)
2. ^{^} $1.35 trillion tax cut plan (www.politico.com)
3. ^{^} slid into a relatively short and mild one in March 2001 (money.cnn.com)
4. ^{^} drumbeat of recession warnings (www.bostonglobe.com)
5. ^{^} Federal Reserve aggressively hikes interest rates (www.bostonglobe.com)
6. ^{^} Economist/YouGov Poll (today.yougov.com)
7. ^{^} reported Friday (www.bostonglobe.com)
8. ^{^} told Yahoo Finance Live (finance.yahoo.com)
9. ^{^} very challenging. (www.yahoo.com)
10. ^{^} US economy grew 5.7 percent in 2021 (www.bostonglobe.com)
11. ^{^} record high trade deficit (www.nasdaq.com)
12. ^{^} declare a recession had started in March (www.nber.org)
13. ^{^} announcement (www.nber.org)
14. ^{^} jim.puzzanghera@globe.com (www.bostonglobe.com)
15. ^{^} @JimPuzzanghera (www.twitter.com)