We’ve seen numerous media reports citing the duration of the post-2008 economic recovery, along with the recent volatility in the U.S. stock market, as indications that a recession is imminent.  Vanguard Global Chief Economist Joe Davis shares his view that, despite these concerns, key elements of the U.S. economy remain strong.  The annual economic and investment outlook prepared by Joe’s team forecasts a slowdown in the U.S. economy, and anticipates periods of market turbulence ahead, but the overall data lead his team to conclude that a full-fledged recession is unlikely to take place in 2019. 

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Rebecca Katz: Okay, well, I want to hear what our viewers’ predictions are. But when we read your latest market and economic outlook, you’re not really calling for a recession.

Joe Davis: No, we’re clearly not. There are odds, there always are odds because something very unforeseen can happen, but we’ve put the probability for the global economy in large part because of the U.S., and just for context, the U.S. has been one of the few economies that has been growing above its long-run potential for 2018 and was one of our ingredients for outlook last year.

We anticipate a softening in both the United States as well as China. China’s slowdown is well underway. U.S., we should see some slowdown over the course of 2019. I think that’s what the equity market potentially may be starting to pick up now. But we can get into more, because I think there’s more that we can talk about there, but we are not calling for an outright recession.

A lot of things would have to go wrong for us to actually experience a recession, and despite the fact that we are now in the 10th year of U.S. economic expansion, which is very long—I mean it was only 2009 that we came out of the recession. Here we are in 2019; believe it or not, not all of the indicators are consistent with us being “very late stage of the cycle,” which means just because the expansion is old does not mean that we’re “due for one.” Age has actually nothing to do with it, despite it’s often commented in the media.

There are some things that are still strong and could see this expansion continue for the next several years. One would be strong consumer demand and balance sheets of households, broadly speaking. The fact that leverages in some parts of the financial system are lower and much lower than they were in 2008, the fact that monetary policy is certainly not overly tight and, if anything, it’s accommodative. And we still have a fiscal tailwind, which will wane over the course of 2019. But for a number of reasons, we don’t think a recession—certainly it’s not imminent. In fact, if I would put an odd on it right now—it would be roughly 20%–25%.

Rebecca Katz: Okay, this is probably the most optimistic I’ve seen you in a few years. In webcasts, you were always like, “Hmm.”

Joe Davis: Well, I think sentiment now is catching up with where I think is a more realistic economic environment. We are going to get growth scares, as we call them, over the course of 2019, so these nagging concerns of recession or so forth. There’s going to be a disappointing jobs market report—I can’t tell what month it will be—if we’re right with the trend, as there’s a greater tightness in the labor market. There’s going to be choppiness in some of the economic data. Some will point to trade, others may point to, “Oh, recession occurring.” So those nagging concerns will be there, and there will be turbulence ahead in 2019. That’s something that I think we have high conviction on. But at the end of the day, there would have to be a lot of things that would have to go wrong, including bad luck, that we would ultimately actually have a recession, something I certainly don’t wish for.


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