NYT's Neil Irwin on what conditions would lead to a recession

[00:00:00] Speaker 1: The possibility of a recession in the United States economy has been a hot topic. From Washington to Wall Street, it's why we've seen the markets moving so drastically over the last couple of weeks. Our next guest says that a pullback in growth is not inevitable, but if it were to happen, he paints the picture of how he thinks it would. That's his latest New York Times piece that's titled, How the Recession of 2020 Could Happen. Let's bring in Neil Irwin. He's senior economics correspondent for the New York Times. And Neil, it's good to see you. Thank you for being here. Thanks. Your piece really caught me because we talk about the potential for a recession, but you lay out how you think it might actually happen. Why don't you explain for people who didn't read it? Yeah. So the starting point, [00:00:37] Neil Irwin: as you've been discussing for weeks now, is the way the trade wars are infecting really the capital spending plans of a lot of businesses, disrupting a lot of industrial supply chains. That's creating global feedback loops where that's affecting the European economy. You have unrelated things happening across Asia and in Europe that are slowing the global economy. That alone isn't enough to really cause the U.S. recession, most likely. But the question is, is that going to be the trigger that eventually causes a pullback for consumers and then has a kind of inadequate policy response out of the Federal Reserve, out of the fiscal authorities? And that's how we can spiral into a [00:01:09] Speaker 1: recession over the next year. Yeah. You really tie it to the idea that companies get nervous and they stop spending as much. And that, in turn, leads to the consumer feeling a little less confident about things. We've already seen that happen. Yeah. But at the same time, there's a [00:01:21] Neil Irwin: plausible path. So, look, we had this incident in late 2015, late early 2016, very similar global forces, Chinese slowdown. It was too tight monetary policy. We had these feedback loops, really bad for the industrial economy, really bad for the heartland, really bad for agriculture, commodities. Service industries, consumers didn't really feel it much. That could repeat itself. So, on the one hand, the good news is that wasn't a recession. The bad news, that did cause a lot of pain to a lot of people and really had implications throughout 2016. So, Neil, we've been talking the last couple of days [00:01:50] Speaker 3: about whether the yield curve could, like, sniff out some exogenous thing, whether it really is got some type of mystical ability to see something coming. It doesn't need that for it to have forecast a recession, in your view. It's just looking at the percentages of what you're describing happening, and we went inverted by a couple of basis points. That's easily explainable by your scenario, I think, isn't it? But does it imply Fed policy mistakes or not necessarily? [00:02:21] Neil Irwin: Yeah, I think it does. I think, you know, if you look just at the long end of the curve, you don't worry about the short end for the moment. Just what's happened to the 10-year yield or any of the longer-term yields suggests not a recession. It suggests a slowdown. So, what that means is if the front end, if the Fed cuts rates and un-inverts the curve, you know, you could end up with a scenario where we have that kind of slower growth, you know, one and a half, two, two and a half percent over the next couple of years, but not the three percent that some people are hoping for. [00:02:47] Speaker 3: You know what I need, Neil? I need a confirmation from the stock market that the yield curve is on to something. And, you know, Jason Furman has a big piece. What's notable about it, there's nothing new in his piece. He just says, we need to deal with our allies, you know, bring them on board for China. It's the same old stuff that never worked for China. But he points out that the stock market's down now because of the tariffs. But the markets, what is it off its highs? [00:03:11] Speaker 1: 4%. [00:03:12] Speaker 3: Is it 4%? I don't think it's 4%. Barely 4%. We're not seeing a confirmation yet. That's not true. The stock market has not forecast a recession anywhere close to it at this point. Wouldn't you feel more comfortable if you really did see a break in the, not comfortable. But wouldn't you think that that confirms the yield curve inversion if we saw some real weakness in the equity markets? [00:03:34] Neil Irwin: Yeah, I mean, I agree with that. But I think there's a circularity here. And what seems to be happening is because the Fed is listening to these signals, because they already cut once, they're probably going to go one or two more times this year. That is kind of essentially forecasting that the curve will un-invert, that, you know, I think that's why the stock market is basically near its highs and isn't flashing those recession signs. I think the question is, is that, you know, 50, 75 basis points going to be enough? Could this get out of control and really be something bigger than the Fed can handle when we were, you know, 2% on the Fed funds rate? [00:04:03] Speaker 1: So because it's circular in nature, where do you think the answer lies? What would keep us from getting into a recession? [00:04:10] Neil Irwin: Look, I think it's slower growth. I think slower growth is the more likely scenario. You know, the survey of forecasters, it's something like 33% odds of recession over the next year. That seems about right to me. This doesn't have to happen. I think the question is, are there the right tools in place? Does the Fed have, you know, enough room to ease? Our fiscal authorities, you know, we saw these leaks yesterday about the White House considering a payroll tax holiday. Are fiscal authorities ready to act if we do hit the zero lower bound again? I think we can avoid this thing. At the same time, we have to avoid it by realizing some of the risks out there. [00:04:39] Speaker 1: Neil, when I heard about the White House considering a payroll tax holiday, I mean, I tried to figure out if I was reading the onion. That seems remarkable to me at a time when we're looking at such great strength in the economy on so many different levels. That seems to me like the type of thing that we reserved for 2008, 2009 when things were really hairy. [00:05:00] Neil Irwin: It is. I don't think there's anything wrong with some contingency planning, thinking about what might be done if there is a downturn, if there is a recession. At the same time, you know, the political landscape is very different than it was. So if you remember in early 2008, forget the dark days of the crisis, early 2008, there was a Bush-Pelosi stimulus. It was not huge compared to the later ones, but it was a bipartisan effort to try and keep that recession from being worse than it was. It's hard to imagine that kind of deal-making happening right now between the Trump administration and Nancy Pelosi and Mitch McConnell. [00:05:30] Speaker 3: Also in the onion piece that we're describing as President Trump in grudge, immediate 100 basis point cut and QE. I mean, God love him. He wants a strong economy. He wants jobs. Whatever it takes, he'd just pour it on. But if you're thinking about 100 basis point immediate cut and then QE, I mean, it's like... [00:05:51] Speaker 1: And we're 4 points or less, or 4% or less from all-time highs in the market. [00:05:55] Speaker 3: It's like those guys are headed in the New York Federal Reserve again to talk about saving the system when you do something like that, right? [00:06:00] Speaker 1: Right. What's left? What makes me think of that, what concerns me, Neil, is what's left? If we throw everything but the kitchen sink at it right now, what's left if it doesn't work and we actually do wind up in a tougher situation? [00:06:13] Neil Irwin: There's actually a bit of a tension, too, between this message of the economy's on solid footing, everything's fine, versus 100 basis points. [00:06:18] Speaker 3: I saw the euro today, 110. I mean, we can't, we cannot budge on the strength. Right. Nothing we do. [00:06:24] Speaker 1: Forget about the yen, which is getting stronger. [00:06:25] Speaker 3: Yeah. Nothing that we do helps. And that is a problem. If you hate trade deficits and you just can't weaken the dollar, I mean, I think that's what he's thinking about all the time. And then we're going to have Coach Lakota on. He's the most dovish guy. And he says the Fed's been wrong for 10 years. Right. Too tight for 10 years because of inflation has been so low. [00:06:45] Neil Irwin: We'll say, look, if the Europeans pull the trigger, pull out the bazookas, people are saying, and do something big in a few weeks, look, it's going to be bad for, it's going to, you know, cause dollar strengthening. That said, the European economy is in rough shape. And I think, you know, one thing that I, I'm not sure the president gets is that the global economy is a positive sum game. And having a strong German economy, strong, you know, French, UK economy is ultimately good for the U.S. And so in that sense, you shouldn't think of it as zero sum on currency. And there's your facial hair guy, Erwin here. [00:07:13] Speaker 3: It works. It looks good. And it's not because you got nothing on top either. You've got, I mean, you've got a, right? You've got it everywhere, but you still decide to go with the beer. But, you know, he does have that gray, I think, that makes it look incredibly intelligent. I mean, everything he said, it seemed more, I don't know, but just seemed more compelling, more, it did when you were talking to him. Thank you. [00:07:35] Neil Irwin: I feel like this last 10 years of covering the Fed has given me a lot more gray hair than I had when I started. [00:07:40] Speaker 3: Right, because they've been too tight. I know. Gravitas, gravitas. [00:07:43] Speaker 1: Hey, Neil, thanks for joining us. It's good talking to you. We'll see you again soon. [00:07:46] Neil Irwin: A lot of fun.