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Faculty Viewpoints

The Trump Boom Is Making It Harder to See the Next Recession

We are overdue for a recession, writes Yale’s Robert Shiller in the New York Times, but economists can't say with much certainty when it will arrive. President Trump's unique effect on mass psychology appears to be muddling the economic data even more than usual.

Unemployed men outside a Chicago soup kitchen in 1931. Photo: Wikimedia.

This article originally appeared in the New York Times.

When big shifts like recessions are on the way, economists just aren’t very good at predicting them.

The truth is that we really can’t foresee where the economy will be heading in a year or two, a limitation that is particularly troubling right now, in the midst of what may be called the Trump economic boom.

President Trump is, after all, a public figure like no other, and his unique—and polarizing—effect on mass psychology appears to be muddling the economic data even more than usual.

Consider how easy it is to be lulled into complacency about the current state of the economy. Growth in the gross domestic product has been strong, the Tax Cuts and Jobs Act amounts to a stimulative fiscal policy, interest rates are still low and consumer confidence is high.

All of this may cause us to assume that the economy will expand forever — and lead us to forget that recessions tend to come, on average, every five years (though lately, some have taken longer than that to develop). Since 1854, according to the National Bureau of Economic Research, the United States has had 33 recessions, and it has already been 105 months since the last one.

If the economy manages to expand for 16 more months, the United States will have set a record. But whenever a recession arrives, the timing is likely to surprise most economists. Data from 1968 to 2017, supplied by the Federal Reserve Bank of Philadelphia in its quarterly Survey of Professional Forecasters, shows that while professional forecasters as a group have had some ability to assess the probability that G.D.P. will decline in the next three months, they have exhibited no ability to do so a year in the future.

In fact, the latest survey gives a 17% probability that real G.D.P. will decline a year from now—which is the average probability for a decline in one year given in all of the surveys since 1970. In essence, these forecasters are saying that nothing special is on the horizon. The risk of a recession is perfectly average. That might be comforting if these predictions were accurate, but, sadly, they are not.

Then there are the confidence indexes, which measure perceptions of business activity in the present and near future. There are strong readings in much of the world. But these findings are limited in their scope.

The Conference Board, for example, in its compilation of the Consumer Confidence Index in the United States, essentially asks respondents whether they think we are on the verge of a recession, or may even be in one. The index does not plumb the underlying attitudes that might be setting the stage either for a long and strong boom or a long and damaging depression, though it is a leading indicator of short-term shifts.

At the moment, Mr. Trump appears to be elevating the levels of the main confidence indexes. That’s to be expected: He may well be the first president who is, at his core, a motivational speaker.

“Go with your gut,” he said in the 2007 book Think Big and Kick Ass in Business and Life, which he wrote with Bill Zanker. (The title was later changed to “Think Big: Make It Happen in Business and Life.”) “Take chances,” he said. “If you think you have the ingredients that you need, take chances, because your biggest successes will happen when you go against the tide.”

Mr. Trump seems to be a living example of going with your gut. Consider his comments on climate change. Scientists generally think global warming is real and human generated. Who would dare to take on all those scientists? Mr. Trump would, because their conclusions just don’t sound right to him, even if he can’t explain why. And the Trump narrative presents him as an unrivaled success: a billionaire, a bon vivant, and now president.

In the same book, Mr. Trump said his approach implied stress: “I want to tell you about the negatives of business as well as the positives. I want to talk about the fact that most people are not cut out to deal with the high stress level of being a great success.” But he advocates stressful risk-taking, not quiet contemplation, for readers who can handle it.

Mr. Trump has personified these ideas and attracted millions of people to them, shifting mass psychology in ways that the confidence indexes will have a hard time capturing. The indexes routinely miss the major changes in spirit that cause long-term economic phenomena like the reckless prosperity of the Roaring Twenties, a decade of high adventuresome spirit in business. Too high, actually.

This confidence crashed, shifting into the gloom of the Great Depression of the 1930s, a period characterized by waves of recriminations and disappointment. As the decade wore on, the term “secular stagnation” became prominent. That depression was “great” partly because it lasted more than 10 years. It wasn’t the kind of greatness that Mr. Trump aspires to in his slogan “Make America Great Again.”

A future downturn isn’t a widespread top-of-mind concern, the confidence indexes show. Instead, we may surmise that at the moment, many people are emulating Mr. Trump and trying to think big. Even those who loathe him might be inspired by his personal success, though this isn’t being measured by the confidence indexes.

But at some point, a significant recession will appear. We can only guess what might make it materialize.

Contagious words and stories, analogous to those using the #MeToo hashtag, could be enough to change the public mood about the Trump boom. Maybe a shift will come from the kind of stories that contributed to the dot-com collapse: tales of recently revered companies that turned out to have taken too many chances and so flamed out and crashed.

A downturn could be set off by compromising stories about Mr. Trump himself, possibly those impugning his judgment in starting an international trade war. Or maybe it will be something subtler, whose link to animal spirits and mass psychology is only indirect.

We don’t really know what will do it. But rest assured, the next recession will surely come.

Department: Faculty Viewpoints