No, We Don't Talk Ourselves Into Recessions


I’ve heard many times that we can talk ourselves into a recession by too many doom-and-gloom discussions. We seem to be running that experiment right now, with rising concerns about an economic downturn. But a look at history shows we never have talked ourselves into recession, and the likelihood that we do so in the future is minuscule.

Consumer attitudes influence consumer spending, which is a huge part of the economy. One key lesson I learned early in my forecasting career is that consumer confidence typically follows the economy, not leads it. When unemployment is low, inflation is low, and interest rates are low, consumer attitudes are almost always good. Conversely, high unemployment, high inflation, and high-interest rates make consumers gloomy. That said, attitudes will sometimes be a bit higher than economic fundamentals would suggest, or somewhat lower, and thus they can nudge discretionary consumer spending from the path it would otherwise take. But it’s usually a small nudge, not enough to trigger a recession by itself.

When non-economic factors influence consumer attitudes, we should pay close attention. That was the case in the First Gulf War. Consumer attitudes dropped sharply in 1990 as the U.S. sent troops to Saudi Arabia after Iraq’s invasion of Kuwait. Unemployment had been edging up slowly prior to the war, inflation had been declining and interest rates were stable. Consumer attitudes did drop, but that may have been connected with a sharp rise in oil prices, which pushed inflation up in the subsequent months. Nonetheless, this looks like a good example of consumer attitudes having an independent impact on the economy. But it hardly seems fair to say that “we talked ourselves into recession” when a war started and oil prices jumped.

Looking through our past recessions, I cannot find any good examples of talking ourselves into recession. Let’s roll through the post-World War II downturns.

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