Joe Davis on the chances of a recession in the U.S.


Rebecca Katz: So, why don’t we jump back to some more of our viewer questions? You know you said there’s optimism and pessimism in the economy, Eden in New Jersey says, “Well-respected economists are saying that the U.S. is headed for a recession in 2017. What is your view on this?”

Joe Davis: I think those odds are low. I mean, initial conditions matter. I think the U.S. economy is going to enter 2017 on decent footing. The service sector is in fairly strong shape, labor market, you know, the unemployment rate is well below 5%, and we continue to add jobs at a fairly consistent basis, Rebecca. That’s not to say, you know, there isn’t a risk of recession, but it would have to be a very significant shock for the U.S. to fall into a recession at this point. I think, if anything, I think our central tendency for the U.S. growth next year is somewhat better than what it was for 2016, marginal improvement. Now the tail risk so-called, the dispersion around those estimates have increased on both the upside as well as the downside in part, because you know, some of the question mark with respect to fiscal policy of the United States and overseas. So the so-called, what economists will call tail risks, or the distribution of outcomes has widened, but generally speaking it’s a little bit more positive going into 2017 than at this time last year.

Rebecca Katz: What are some of the things that you would be looking at that could tip us into recession or have stronger growth than expected?

Joe Davis: Well, let’s look at the positive first. I mean, we tend to always focus on the negative. I think on positives— I mean, I think already, just to set benchmarks, the U.S. economy has been growing roughly 2% over the past five or six years. Historically, it was between 3% and 4%, so below historic and that’s not news to many of the viewers. You know, I would have said the U.S. economy had decent odds of going 2.5%, perhaps even closer to 3%, that’s before some of the discussions of more significant fiscal policy, which in our mind, was somewhat lacking over the past several years. So, I don’t think what we may see on the policy front will change markedly the 2017 outlook, but I think at the margin, whether through corporate tax reform or potentially modest infrastructure spending, you could lift some of those numbers. But again, whether or not the economy remains strong this year, that can be so much for policy. I think it’s gotten actually, a little too much attention. I think, you look at the private sector which is roughly 90% of the economy, it’s performing decently and there’s greater confidence. Consumer confidence, business confidence, it’s actually by some measures as high as the late ’90s and 2003, 2004. So again, it’s not to say that we don’t have some challenges, but modestly continued to deliver progress over the past seven years, so here’s where we are. So, I think that’s good and that’s on the positive. So, I think for the first time, in 10 years, global growth expectations during the course of 2017 will not be downgraded, because they have consistently come in weaker than expected. I mean, for the first time in a long time, we’re seeing them more balanced, so that in itself is good news. Now on the negatives, you know, I think some— You know, I think our three biggest areas we focus on is China and the prospects for a hard landing meaning their housing market really deteriorates, capital outflows, and that incites global financial panic. We don’t place very high odds on them in the near term 2017, 2018, that’s one. Secondly, would be Europe. I think we will continue to have lingering doubts around just the sanctity of the European Union. We still believe the euro will remain intact as a currency in the European Union, but that will continue to be tested because they are not fully out of the woods. We saw the Italian headlines today; we will see occurring election headlines in 2017, whether it’s from France or Germany. And then finally, in the U.S., the one thing that I think is the biggest wild card in our forecast, and to be fair, I think most economists in the financial markets, at least right now, are looking beyond and that is the uncertainty with respect to trade policy. Which, if it became very protectionistic, would actually I think, be very deleterious for the markets and from a policy perspective that could both reduce growth expectations and raise the threat of higher inflation. That would not be a good mix. That is not our baseline either, but there are the three negative risks that we are most closely monitoring: trade policy, Europe, and then China.

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