The Extremely Cautious Case For Extremely Mild Optimism Interest rates are higher, global growth is slowing, and the government is at an impasse. But there are also reasons for near-term optimism about the U.S. economy.
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The Extremely Cautious Case For Extremely Mild Optimism

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The Extremely Cautious Case For Extremely Mild Optimism

The Extremely Cautious Case For Extremely Mild Optimism

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Hey, everyone. This is THE INDICATOR FROM PLANET MONEY. I'm Cardiff Garcia.


And I'm Stacey Vanek Smith. So we have covered on this show the reasons why the U.S. economy might have a recession within the next couple of years. For example, the U.S. is still in a trade war with China, and economic growth in the rest of the world is slowing down. And both of those things could mean that other countries just won't buy as many American products. Plus, the Federal Reserve has raised interest rates for the last couple of years, which makes it more expensive for people to borrow and spend money. And the stimulus from the big tax cut that was passed at the end of 2017 is expected to start fading around the end of this year.

GARCIA: And all that is before we even get into the dysfunction of the government, which, as of this taping, is still not reopened.

VANEK SMITH: Shutdown 2019.

GARCIA: Yeah. And, hey, look. The trauma of the last recession was so deep that none of us wants to miss the next one. But what about the other side? What about the case for optimism?

VANEK SMITH: I don't like it.

GARCIA: (Laughter).

VANEK SMITH: (Laughter).

GARCIA: Yeah, not predisposed to it. But economist Jared Bernstein, an old friend of the show, got in touch with us because he thinks we should not neglect the positive economic signals either. He joins us from NPR studios in Washington. Jared, I guess we were just bumming you out, man.

JARED BERNSTEIN: Well, yes and no. As a card-carrying economist, I can pretty quickly share anybody's pessimism about the - it...

VANEK SMITH: Yeah, come on, the dismal science.

BERNSTEIN: Yeah, dismal, exactly.

VANEK SMITH: Yeah (laughter).

BERNSTEIN: So that has that name for a reason. But I do think there are a couple of important positive indicators that are being overlooked.

VANEK SMITH: OK. Well, Jared, so coming up after the break, we're going to have you break down a couple of reasons why you think the economy might be more resilient than us doomsdayers (ph) think (laughter). It's like a silver-lining INDICATOR. I like it.

BERNSTEIN: Sounds good.


GARCIA: OK. Jared, you've got a couple of main reasons for being kind of cautiously optimistic about the economy.

BERNSTEIN: I guess, just to clear it up, let me say...


BERNSTEIN: ...I don't even know if I would say that I'm cautiously optimistic. I would say that I'm near-term optimistic. I don't see a recession in the next six to maybe 12 months.

VANEK SMITH: You're already hedging the silver lining?

GARCIA: (Laughter).

BERNSTEIN: Like I said, dismal (laughter).

VANEK SMITH: Oh, I feel like this bodes ill.

BERNSTEIN: Here's the thing. One of the underappreciated indicators of the next recession being imminent is economists telling you that it isn't. So, you know, I want to be careful not to fall into that trap.

GARCIA: OK. So before we look at quasi near-term optimistic indicators...

VANEK SMITH: (Laughter).

BERNSTEIN: (Laughter).

GARCIA: ...Let me ask you this, though, Jared. I want to ask you first about the pessimistic case and whether you think there are any holes in it. So the idea that the Fed has raised interest rates too much or that the stimulus from the tax cut will eventually start fading or that trade wars and weak global growth will all feed back into the U.S. - do all of those signals makes sense to you? Is it sensible to worry about those going forward?

BERNSTEIN: All of those signals are sensible, but I think all of them are also weaker than some of the rhetoric we're hearing today suggests. Global growth slowdown is a big one. Well, we're just much less exposed to foreign trade than most other countries. I mean, we export 12 percent of GDP. If you go to Europe or China, you'll see export shares that are twice and three times that amount. Yes, the Fed is in the picture, but I think the Fed is being quite cautious and talking very seriously about pausing their interest rate-hike campaign. Sure, markets are extremely volatile, and that's a worrying sign. But most people's income doesn't come from their stock portfolio. It comes from their paycheck. And one of my positive indicators is the latter.

VANEK SMITH: Oh, OK. So basically, the fact that we tend to shop more than we sell is, like - is part of what is, like, batting in our favor?

BERNSTEIN: It's a huge plus in the following sense. I don't know if you've chosen an indicator for today. But if I may suggest at least a sub-one for today...


BERNSTEIN: ...It would be that the American economy is 68 percent consumer spending. Now, if you go to China, that's 40 percent. If you go to Europe, that's 55 percent. We are much more acquisitive, or shopaholic, than many other economies. And as long as our labor market continues to generate decent-job, real-wages paychecks - not for everybody. There's still a lot of people left behind, no question. But just in a macro sense, that is one of the positive near-term indicators that make a recession in the next, say, six months really very unlikely in my view.

VANEK SMITH: So as long as we keep shopping, we're OK.

BERNSTEIN: It's not the only thing that matters, but it's a big one.

VANEK SMITH: OK. So now let's go to the reasons for potentially being optimistic about the economy - not just not pessimistic, but actually optimistic. There are some indicators that you feel like are actually pointing in a really good direction for the U.S. economy.

BERNSTEIN: Yeah. So for example, one indicator that tends to get kind of overlooked is the condition of household balance sheets - that is, household income net of spending. That tends to be a pretty good forward-looking indicator. And the reason is...

VANEK SMITH: So is that just how much money, like, households are saving, like a profit - like, household profit?

BERNSTEIN: Yeah, it's kind...


BERNSTEIN: Yeah. It's much like a balance sheet like you'd have in a bank, assets minus liabilities. So it's kind of household income minus what they spend. And if you look at the household balance sheet, it's actually pretty strong. It's around where it's been on average over the last 50 years. And this is important because if there's a credit crunch, which is the cause of numerous recessions in the modern era, it means households have more to fall back on. And in fact, even if you look at corporate balance sheets, they're pretty good too, for all the talk of corporate indebtedness.

VANEK SMITH: So we have kind of a cushion happening, even though there are, like, a...


VANEK SMITH: ...Like, some - even though the stock market's volatile, even though interest rates might be going up, it's like households are in kind of a good position, relatively prepared.

BERNSTEIN: And there's two reasons for that. One is the strong job market. And again, most people's income come from their paycheck, not their portfolio. So the strong labor market is kind of at the core of a lot of my near-term optimism. And then the fact that interest rates - yes, they've been going up, but they're still pretty low. So debt service isn't that problematic for many households.

GARCIA: Yeah. And I guess, Jared, given that the strong labor market is at the core of these two reasons for being somewhat optimistic, I guess this natural follow-up question is, what are the chances that the improvements in the labor market will start to reverse, given how strong it's been lately?

BERNSTEIN: It's an important question because the labor market kind of looked backwards relative to some of the other more forward-looking indicators we can talk about. But I think the unemployment rate is probably going to come down further this year. So as long as the job market remains strong - I mean, people kept saying we're going to start creating many fewer jobs every month. And I know you and the air horn get really excited every time we, you know, have a good jobs day.

VANEK SMITH: We really do.

BERNSTEIN: And you've - we've had a lot of that lately. And so there seems to be more room to run in the labor market than a lot of people thought. So again, in my very near-term analysis, I see the unemployment rate probably coming down more over the next, say, six to nine months. And that will continue to support a stronger job market. My concerns kind of kick in at the end of 2019. And it's related to something Stacey said earlier, which is the fading of fiscal stimulus.

GARCIA: Can you elaborate on that?

BERNSTEIN: Yes. By the end of 2019, Stacey correctly pointed out that the - some of the fiscal stimulus from the tax cuts are going to be fading. Equally important is a whole bunch of deficit spending that Congress engaged in. If you put it all together, the deficit has been adding maybe three-quarters to a point to GDP growth in 2018 and 2019. That fades at the end of this year, so I expect the growth rate to go down from 3 percent to around 2 percent. That's a pretty conventional forecast, by the way. Now, that's not a recession, but it ain't great either.

VANEK SMITH: Hey, but you're supposed to be our optimist (laughter).

BERNSTEIN: Well, yeah. I mean, I guess - to the extent that I'm at all optimistic, it's simply the case that near-term recession arguments don't make a lot of sense to me given household balance sheet, given the strong labor market, given our diminished exposure to foreign growth issues. Once fiscal stimulus kind of, you know, leaves the auditorium, as it were, then a lot of these headwinds get a little bit tougher. And I do see the economy slowing down later in 2019 now. So let's get ready for the next downturn, wherever it is.

GARCIA: Jared, thanks so much. Always a pleasure.

BERNSTEIN: Well, thank you.


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