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1) According to this article, what factors are driving recession fears? 2) Why does this author not believe that a recession is imminent or serious? 3) What areas of uncertainty remain in the U.S. economy? What else is are areas of vulnerability? 4) How does this article support/relate to Real Business Cycle Theory? 5) What about this article contradicts Real Business Cycle Theory?
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4/2/2019
Let’s Not Stress About the Next U.S. Recession – Bloomberg
Economics
Let’s Not Stress About the Next U.S. Recession
It’s probably not imminent, and won’t be severe.
By Bill Dudley
April 1, 2019, 7:00 AM EDT
It won’t be that bad. Photographer: Dorothea Lange/Hulton Archive/Getty Images
With recession anxieties climbing, people are increasingly worried about the Federal Reserve’s
capacity to respond. I take issue with the premise: I don’t expect a recession this year, and when
one does come I think it will be mild enough for the Fed to handle.
Three factors seems to be driving recession fears. First, recent data — such as weak job growth
and soft retail sales — have shown the U.S. economy losing some momentum. Second, the
Treasury yield curve recently partially inverted, that is some long-term bond yields fell below
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Let’s Not Stress About the Next U.S. Recession – Bloomberg
short-term yields. This is noteworthy because yield curve inversions have historically
foreshadowed recessions in the U.S. Third, the current economic expansion is getting very long
in the tooth — in a few months it will be the longest in U.S. history.
Nonetheless, I’d argue that the risk of recession remains low. For one, some areas of concern are
becoming less relevant. Financial conditions have rebounded as the stock market has recovered
from its December rout. China is aggressively stimulating its economy again. And from my
vantage point, the U.S. and China seem likely to reach a trade deal soon. This would help dispel
uncertainty that has been causing businesses to defer investment.
Beyond that, worries about a yield curve inversion are misplaced. These anxieties would be
more compelling if the Fed were causing the inversion by making monetary policy tight. That’s
not happening, as easy U.S. financial conditions demonstrate. The yield curve is flat because
investors are more worried about economic weakness and deflation than about an unexpected
increase in inflation. Bonds are viewed as a good hedge for stocks should the economy slip into
recession.
I also take solace that the most important part of the U.S. economy — the household sector — is in
very good shape. Incomes have been accelerating, boosted by job and wage gains. Household
finances are relatively strong: Debt levels have grown slowly during this expansion, and debt
payments take up the smallest share of income in many decades.
Finally, government spending is rising, thanks to last year’s increase in federal discretionary
budgetary caps. This boosts demand and stimulates economic activity.
All that said, I don’t think recession fears will fade quickly. For one, economic growth is likely to
be very slow in the first quarter, held down by the government shutdown, trade uncertainty,
delayed tax refunds and perhaps some technical issues involving seasonal adjustment. And,
there are still a few areas of uncertainty:
Trade tensions with China could escalate and tariffs could increase;
Inflation could accelerate more than expected, pushing the Fed to raise interest rates further;
Congress could fail to extend the increase in the discretionary spending caps, forcing the
government to cut expenditures.
Also, there is one area of vulnerability that could exacerbate any downturn: corporate debt.
During this expansion, companies have levered up, borrowing money to buy back shares and
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Let’s Not Stress About the Next U.S. Recession – Bloomberg
deliberately allowing their credit ratings to decline. As a result, there has been a huge increase in
the amount of debt rated “BBB,” a significant portion of which could drop into junk territory
when the next recession hits. A big increase in the amount of junk bonds could cause indigestion
as this market is small relative to the size of the investment-grade debt market. This could lead to
a credit crunch that would exacerbate these companies’ troubles.
Also, the Tax Cuts and Jobs Act made the U.S. economy more vulnerable in two important ways.
First, companies that lose money in a downturn can no longer get refunds against their prior
years’ tax payments. Second, the legislation imposes limits on the deductibility of interest. As
earnings fall, such constraints become more binding.
Despite these issues, I don’t expect the next recession, whenever it does come, to be anywhere
near as harsh as the last one. Downturns associated with financial crises tend to be particularly
painful, and I believe the U.S. has done enough to prevent a repeat of the 2008 disaster. Hence,
the country is more likely to experience a garden-variety slump, which the Fed should be
capable of handling. Even if the central bank has less scope for rate cuts should the federal funds
rate peak at 3 percent or less, it has plenty of other tools — such as forward guidance and
quantitative easing — to stimulate the economy should that become necessary. And, the rise in
the nation’s indebtedness does not rule out the use of fiscal policy stimulus.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Bill Dudley at
To contact the editor responsible for this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net
Bill Dudley is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He
served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of
the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.
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Econ 2202
Professor Greenberg
Week 7 Worksheet
1) According to this article, what factors are driving recession fears?
2) Why does this author not believe that a recession is imminent or serious?
3) What areas of uncertainty remain in the U.S. economy? What else is are areas of
vulnerability?
4) How does this article support/relate to Real Business Cycle Theory?
5) What about this article contradicts Real Business Cycle Theory?

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