Everyone is losing their mind about the possibility of the recession, but in reality the US economy is fine

A lot of people in the media are talking about a recession hitting the US economy, and it's driven interest among the public in possible economic doom.

But economic data points such as unemployment benefits, manufacturing activity, and GDP tracking all show a relatively stable US economy.

Also the market isn't exactly pricing in an imminent recession.

Neil Dutta is head of economics at Renaissance Macro Research.

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The asymmetry in economic reporting has always been obvious. Bad news tends to get amplified and good news tends to be underreported.

Still, in the past week or two, things have gone a bit overboard. I'll concede that President Donald Trump hasn't helped his cause, but I'd argue recession talk has gained much more traction than warranted based on the available evidence.

The natural state of the US and global economies is growth. If that condition looks at risk, of course the news media will bring attention to it. Accidents are covered; the regular flow of traffic is not.

The US economy is on solid footing, and while there are dangers out there, a recession is not on the near horizon.

People are worried about the idea of a recession, but not about the economy

Internet searches largely bear out the idea that the recession fears are mostly narrative-driven, rather than data-driven. Google searches on “recession” have spiked quite notably recently, but searches on “unemployment benefits” have not.

Compare this to the period leading up to the 2008 recession. Searches on “unemployment benefits” were rising steadily before searches on “recession” spiked. Perhaps one could argue that benefits are filed only after someone loses their job, but it is pretty clear that the contemporaneous correlation between these two series is much lower today than it was between 2008 and 2009. Despite the concern over recession, consumers continue to point to a strong jobs market.

Similarly, search interest appears to be somewhat higher in the US than the rest of the world, even though the global economy is widely believed to be far more fragile than the US.

Actual economic data is still strong

The Washington Post, under the headline “The month Trump's economy faltered,” reported that “bad economic news continued” as “US Steel could be temporary laying off up to 200 workers at Michigan facility.”

We understand why this exposes a political vulnerability for the president in a state he barely won in 2016. But if layoffs are the concern, perhaps context is important. The level of initial jobless claims has been running at near-record lows for months on end, even after the trade war got going in earnest in early 2018.

Similarly, on “Meet the Press,” Chuck Todd said: “Manufacturing declined in August. Why is this important？ It's the first time that production has shown a contraction in almost a decade.” Again, the idea is to expose a political vulnerability for Trump in a critical industry in states Trump needs to win.

Read more: The doomsday warnings about the US housing market are getting it backward

But in reality, while manufacturing production has contracted modestly, the performance over the past year has held up better than the 2015-to-2016 period. Employment in manufacturing is actually up this year. Todd adds that “perception is almost as important as the reality.” He is playing a small part in shaping that perception.

The high-frequency data are not exactly screaming recession either. We were struck by a recent Bloomberg News report that said “the US economy has sputtered in recent days.” This was a curious statement, since in the week before the article's release, estimates for current quarter GDP tracking were moving up because of a strong retail sales report.

Yes, there have been pockets of weakness such as manufacturing, but the recent recession chatter has been surprising since economic data is generally coming in better than economists' expectations, as evidenced by an upturn across a number of different data surprise indicators. Of course this could change, but it is admittedly odd to be discussing recession as the US data beats consensus estimates.

The market also undercuts the idea of an impending recession

The Treasury yield curve has also garnered a fair bit of coverage. Trump himself has brought attention to this, lamenting the “crazy inverted yield curve.” So we'd expect the press to highlight this. Moreover, the curve has been a reliable indicator for a recession, as many reporters are also quick to highlight.

But nuance is important. Typically, ahead of a recession, we see a bear flattening of the yield curve as short-term rates rise more rapidly than long-term rates. In the past two recession, the Federal Reserve hiked interest rates even after the yield curve inverted! That's decidedly not what is happening today.

Instead, we've seen a bull flattening of the yield curve. That is, long-end rates have dropped more rapidly than front-end rates. Three-month bill yields have dropped 50 basis points over the past year as 10-year yields have plunged over a full percentage point. The Fed has cut following this inversion, and that is expected to continue.

Interestingly, other swaths of the asset markets are not nearly as priced for recession as the Treasury market.

Corporate credit is a good example. A measure of risk-taking in the corporate credit market, the excess bond premium has been shown to be a fairly useful recession indicator. The odds today are quite low.

Equity volatility has picked up somewhat but has certainly been higher in the recent past. Stocks are off about 6% from their recent highs. We've seen similar sell-offs in equities no fewer than 15 times since 2010.

None of this is to let the president off the hook. Indeed, a continued escalation in the trade war could tip the US into recession in the next year, but that is still very much a forecast. Let's not talk about it as if it were a present-day reality.