The “R Word”

The “R word” has made its way into the mainstream media, and believe it or not, their doomsday predictions could cause a recession in 2019.

Why? Most recessions are a self-fulfilling prophecy.

We have been trained to fear recessions, and why wouldn’t we? Recessions are not positive for the economy, but they are part of a normal economic cycle. When they happen, it might feel like it’s the end of the world, but it most definitely is not.

How likely is a recession in 2019?

When the Federal Reserve makes a countermove to cool down an overheated economy, predictions for a recession begin. The Fed is on guard against inflation rising sharply, so they attempt to get ahead of it. When they change policy direction, alarmist reactions are triggered. During previous recessionary periods, conditions demanded a change in interest rates to fend off inflation.

We have had low interest rates for a long time. Inflation is not rising, but wages are. The job market is healthy and may be peaking, which tells us the Phillips curve may come into play. (The Phillips curve is an economic theory that states that low inflation is associated with higher unemployment and vice versa.) The Fed would step in and tighten the monetary policy if this were to occur.

So, the Fed hasn’t made any moves to trigger panic, and this brings us back to the media. It is likely we’ll see a recession in 2019 if the media doesn’t calm down. When the consumer is spooked by scary trends and statistics, they tighten their purse strings. Maybe they don’t stop spending entirely, but they certainly become more cautious and put off big purchases. (Let’s also not forget that there is a lot of uncertainty hanging over the economy right now.)

Because consumer spending accounts for around 70% of the US economy, lower spending has a huge effect on the economy. Thus, a recession becomes a self-fulfilling prophecy.