Observing the gap between Wall Street jitters and Main Street optimism, some are inclined to point out that “the stock market is not the economy.” But you should resist that temptation. The stock market is not the entire economy. (Neither is wage growth or health-care spending.) Rather, the stock market is a part of the economy that reflects both the value of capital investment in public companies and a prediction of their future earnings. As labor costs increase (good news for workers), and interest rates creep up (good news for traditional savings accounts), cost of business increases for many large companies, which can hurt their stock value.
For many years, corporate profits thrived as labor costs were low. Now corporate profits are at risk as labor costs are rising.
But this parallelism isn’t very satisfying for investors and businesspeople who want to know what happens next. Could a downturn on Wall Street trigger a decline in business investment that could ripple throughout the economy? Or, to cut straight to the point, is there gonna be a recession, or not?
Read: The U.S. isn’t prepared for the next recession.
One way to predict the likelihood of a recession today is to look back at the past few downturns and evaluate whether the U.S. economy is in danger of repeating history.
Let’s start with the 1970s, when a series of oil crises contributed to a rare period of stagflation. (The portmanteau signifies a combination of stagnant growth and high inflation.) Today, conversely, oil prices are low, which helps consumers and businesses feel richer while hurting the energy industry. Despite the fact that the U.S. is now the world’s leading oil producer, America is predominantly a consumer-and-services economy, not an oil-and-exports economy. Even a long-term decline in oil prices is, therefore, unlikely to cause a serious downturn.
The recession of the early 1980s was a byproduct of the Federal Reserve’s decision to jack up interest rates to cool off rampant inflation—somewhat like a fire department flooding a house to save it from a fire. But today’s economy is neither burning nor flooding. Although the Fed is again raising rates—and there is a robust debate among monetary-policy analysts over whether, and how fast, it should do so—the baseline couldn’t be more different. Inflation is low, and—relatively speaking—so are rates.
The next two recessions, in the early 1990s and early 2000s, were more complex in origin. The 1987 stock-market crash—in which the Dow lost more than a fifth of its value in a matter of days—coincided with the collapse of the savings-and-loan industry in the late 1980s. Because the government bailout of the S&L banks contributed to fears of rising federal deficits, the Fed quickly raised interest rates. Adding to the economy’s woes, the Iraqi invasion of Kuwait in 1990 caused oil prices to double in five months. Consumer confidence tanked, taking economic growth down with it. The 2001 recession probably had little to do with the 9/11 terrorist attacks or the bursting of the dot-com bubble. A 2003 analysis of the downturn by the Federal Reserve Bank of St. Louis listed several variables, including a sudden decline in exports and a sharp drop in business investment in the first half of 2001.