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The Fundamental Strength and Resilience of the U.S. Economy

"any talk of consumer spending and recession can’t be separated from the housing rebound experienced this past year:


...homebuilder confidence numbers also confirm the strength of the rebound in the housing market. The housing rebound strikes at the core of the weak consumer story. Panicked consumers on weak financial footing are not going to be driving housing activity higher. 


Quite frankly, the rebound in housing should have ended recession talk altogether. While a weak housing market does not always signal a recession (for example, see 1995), recessions are always preceded by housing downturns. Typically, housing starts peak around two years prior to the onset of recession. That means that if housing starts are still climbing, the likelihood of a recession in the upcoming two years is fairly small. 


The reality of the situation is many ignore the fundamental strength and resilience of the U.S. economy and hence overestimate the probability of recession. Household are particularly resilient as once spending patterns are set they become very sticky. People don’t change their spending patterns absent a big shock to their income. The big negative shock is generally job loss, which means that a recession is likely to be what causes consumer spending to tank, not vice-versa. 


Once you recognize that resilience, you realize why recessions are both rare events and hard if not virtually impossible to predict with any certainty. It takes a large shock to throw the economy into recession. A small shock to an increasingly small sector like manufacturing just lacks to the punch to make it happen. 


Bottom Line: I know that it is easy to be seduced by the bearish warnings of market prognosticators. We seem to be hard-wired to be cautious, always worried that we are about to become prey. It is important to keep those fears in check. Years ago I quipped “As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying (and under-appreciated) impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy.” That lesson is too often forgotten."


(Consumer Spending Has Plenty of Support dated 01/23/20 by Timothy A. Duy, Senior Director with Oregon Economic Forum & Professor of Practice with Department of Economics at University of Oregon)


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