Historically there are three things that can lead to recession. The first is growing inflation. The second is exogenous events. These are events that are out of the norm and almost impossible to predict, such as world war. The third is policy errors, either by the Fed or some sort of political entity. An example of this is if the Fed raised interest rates too fast and, in turn, slowed up the economy. A situation like this has historically led to recession. The reason that policy is in focus right now is because everything else seems to be going smoothly. Small business optimism and consumer sentiment are near all-time highs. Unemployment claims are at a 45 year low. One of the only downsides possible is this potential policy error. This is why people seem to be focusing on it so much because other than that there really isn’t another risk for recession right now.
There is a saying, “Bull markets climb a wall of worry.” So, as we continue to have topics such as the recent tariffs with China, it keeps people paranoid enough to not get euphoric. The last thing we want is to be overly optimistic. That’s why these healthy corrections happen often. Also, the volatility that has popped up in the market is more of the norm, unlike the abnormality we saw in 2017 with the all-time low volatility. Out of those three items listed above, policy errors are the only one that’s relevant. Dating back to several different presidents we have seen several policy errors that didn’t lead to recession. In other words, the policy errors would have to be pretty significant to lead to recession.
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