Why Everybody Stopped Worrying About a Recession

A trader pumps his fist at the closing bell of the New York Stock Exchange on Dec. 5. Inflatable Santas and other Christmas decorations are in the background.
Relax and enjoy the holidays. Bryan R. Smith/Getty Images

Back during the summer, everybody seemed to be worried that an economic downturn was coming. The bond markets were flashing ominous warning signs. Stock traders were suffering chest pains over Donald Trump’s seemingly intractable trade war with China. The job market appeared to be losing a bit of steam, and housing had been in a yearlong slump. Things looked bad enough that Elizabeth Warren went ahead and predicted an imminent economic crash. I personally freaked out and wrote an article titled, “Someone Should Probably Step In and Stop the Economy From Tumbling Into a Recession.”

And then they did! Flash forward a few months from all that fretting, and the bearish roaring has died down. Things seem strong and stable enough that at Thursday’s debate, moderator Judy Woodruff felt compelled to ask the Democratic presidential candidates how they planned to take on Trump when the economy is still on a tear.

So what changed?

The short answer is that government officials noticed the looming danger and made a course correction, both in the U.S. and around the world. The Federal Reserve cut interest rates three times. Other countries’ central banks similarly eased up on monetary policy. The Trump administration, meanwhile, struck a “phase one” deal with China, which averted an additional steep and destabilizing round of tariffs.

These moves were important for a couple reasons. First, they took pressure off the economy: After two years of hikes, interest rates were almost certainly too high, and the threat of more tariffs has likely hurt investment. But just as crucially, the moves showed that policymakers were actually alert to the dangers of the moment and willing to take steps to prevent a downturn.

Take the Fed. Historically, the central bank has often been slow to see trouble on the horizon, sometimes disastrously so, such as in 2008. And while it first cut interest rates in July, Chair Jerome Powell sent mixed signals about whether the Fed would be willing to lower them again, which left many investors and analysts ill at ease. Were policymakers really willing to do whatever was necessary to keep the economy afloat? Or were they still too worried about the possibility of inflation? Powell answered the question by slashing rates twice more and making it clear that the board would react as circumstances changed, assuring reporters that “our eyes are open.”

“There will come a time, I suspect, when we think we’ve done enough,” he said in September. “But there may also come a time when the economy worsens and we would then have to cut more aggressively,” said Mr. Powell at a news conference Wednesday. “We don’t know.” To a lay listener, it may not have sounded like a bold statement. But to the markets, it was a reassuring sign of flexibility.

While the Fed showed that our central bankers are awake at the wheel, Trump’s “phase one” deal with China demonstrated that there is something resembling a rational actor in the White House when it comes to trade. Trump’s still showing flashes of his irritable and ignorant unpredictability, such as when he accused Argentina and Brazil of manipulating their currencies earlier this month (they haven’t been). But the recent progress with Beijing suggests that he’s more interested in winding down the conflict before his reelection than in waging a mutually destructive war with the world’s factory floor.

With lower interest rates and de-escalating trade tensions, some economic indicators have improved, while others have stayed strong. The economy has added jobs at a faster pace during the second half of the year. Housing actually added to gross domestic product during the last quarter, which hasn’t happened since the end of 2017, and Fannie Mae’s economists are predicting that it will be an “engine of growth” going forward. Quarterly growth has yet to fall below 2 percent, and consumer spending refuses to quit. Even manufacturing, which has struggled this year, bounced back a bit in November.

There are still some reasons to be concerned. Business investment has yet to turn positive after shrinking the last two quarters. The U.S. Treasury yield curve inverted for a period of time earlier this year—meaning returns on long-term bonds fell below those on short-term bonds—an event that’s been a reliable recession predictor for decades. Donald Trump is still an erratic and belligerent human being who could always do something rash. Maybe in six months China’s debt bubble will really start to burst and the press will be screaming about a global recession all over again. And of course, even if the economy is strong in a cyclical sense, there are plenty of struggling middle-class and poor families. But for now, at least, we seem to have pulled back from a precipice.