At the beginning of the year, fears were widespread that recession was heading toward the U.S. — and, indeed, the rest of the world. Even the perennially optimistic Wall Street Journal survey of economists put the odds of recession in the coming 12 months at 21%, twice the level anticipated a year earlier and the highest reading since 2012. On balance, I believe the pessimism over the economic outlook and in financial markets was overdone early this year — but so too is the more recent euphoria.
Early this year, major country central banks and world leaders in effect acknowledged the impotence of monetary policy in what I call “the age of deleveraging.” They called for labor market and other structural reforms, infrastructure spending, and more business-friendly tax structures. For China, they recommended shutting down zombie companies such as steel mills wallowing in excess capacity, and slashing the huge stockpile of excess housing.
Investors, meantime, were worried about big unknowns including whether the Fed would keep raising interest rates, whether China would continue to devalue the yuan, whether the U.K. would leave the European Union, and whether the next U.S. president would be Donald Trump on the extreme right or Bernie Sanders on the far left.
I’ve never been shy about forecasting recession when the conditions are ripe, as I did emphatically during the dot com bubble of the late 1990s and in 2007 as the collapse in subprime mortgages began to unfold. But this year, I simply didn’t see a trigger for a business downturn (although I did allow that if crude oil prices dropped to my target of $10 to $20 per barrel, the resulting financial fallout would probably precipitate a global economic downturn). Instead, I noted that recessions have typically resulted from substantial Fed interest rate hikes or major shocks.
Sure, the Fed raised interest rates in December and planned four more hikes in 2016; but it had cried wolf so many times about accelerating growth and a resurgent labor market that if it did nothing last year, its credibility would have been further eroded.