09/06/2016
Why Economists are Divided over Recession Risk

Why Economists are Divided over Recession Risk

By most conventional measures, the economy has looked relatively healthy in recent months. After a prolonged slide in 2015, industrial production has bounced back. Consumer spending has rebounded. The economy added over 150,000 jobs in August, and initial jobless claims are near a forty-year low.

Even so, most economists have placed the odds of a recession starting within a year at about one in five. While this prediction doesn’t spell imminent doom, it is double the odds from a year ago.

Does Election Season Spell Recession?
Without even considering the unusual characteristics of this election, recessions do have a tendency to occur in close proximity to presidential elections. The U.S. has entered a recession roughly twice as frequently in the year following the election of a new president compared to all other years, according to Kevin Hassett and Joseph Sullivan. Five of the last eleven recessions landed within this timeframe. Since 1854, 41% of all recessions have begun during election years, despite the fact that presidential elections held once every four years (25%).

Jason Schenker, president of Prestige Economics and author of the book “Electing Recession,” makes the ominous point that the U.S. has never seen three consecutive presidential terms without a new recession starting. President Obama first took office during a recession, but none started during his tenure. The economic expansion we have seen recently, while weak by many measures, has been unusually long-lasting.

In interviews on the subject, both Mr. Schenker and Mr. Hassett pointed out that the cause isn’t fully clear, and the sample size is small, with just 11 recessions since the second World War and only 33 since the 1850’s. It’s possible the findings are largely a coincidence, or there is another underlying cause.

For clues, we can look to economic uncertainty. Heightened uncertainty and a pervading sense of unease does real economic damage. Tightly-contested elections may tend to exacerbate these negative effects, as investors and the market at large can’t settle on an outcome.

Recent Historical Examples
Short recessions occurred shortly following both of President Eisenhower’s elections, despite the economy’s relative strength throughout the 1950’s. Still, historians and economists are unable to reach a consensus about what role, if any, Ike played in the two downturns. Shortly after President Reagan was elected a recession began, but most economists say the cause was higher interest rates from the Fed after an extended period of inflation. As you can see, stories about the election being the cause of a recession quickly become convoluted.

It could all just be historical coincidence, and maybe this election season will be fine. But it’s not difficult to see why forecasters are reluctant to project enthusiasm. With peak uncertainty levels on the way, it’s smart to have a plan of action.

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