RECESSION - A SELF FULFILLING PROPHECY?

RECESSION – A SELF FULFILLING PROPHECY?

November 2019

Lately we’ve been hearing a lot about the “next recession”. Huh? A recession? Wherever the “recession” may be happening, it certainly is not something we or our industry seem to be experiencing at the moment. So, the question becomes, how exactly do we know when a recession is around the corner?

The honest answer: Chatter!

You heard right, chatter! Recessions rarely happen because, well, there’s an economic downturn. They generally happen when people talk themselves into it. Here is how the process begins…

News organizations begin to loosely toss the word around, whether its bound in sound data or not. Businesses hear the chatter and begin talking about it around the water cooler. And suddenly, the self-fulfilling prophecy starts to kick in. Hard to believe that just talking about a recession can have a self-fulfilling affect, but the truth is, we’ve watched this scenario play out over and over again during past decades.

Generally speaking, most (not all) recessions have been sparked by chatter generated by news organizations, perhaps with no factual support to make such an assertion. The first media outlet (perhaps politically motivated) will test the waters by telling their viewers that the real possibility of a recession looms. Not to be outdone, a second, then third, and fourth news outlet starts mentioning similar possibilities, and quickly noise levels regarding a recession heighten. The chatter.

Within a week or two, you’ll begin to see businesses react; they begin to go into protection mode in case the inevitable actually happens. Like a light switch being turned off, suddenly the talk of expansions and increased hiring slow down, travel and offsite meetings are curtailed, raises and bonuses are reconsidered, and BOOM, WE ARE IN A RECESSION. Just like that! With the exception of post 9-11, we have watched this scenario play out time after time after time.

The truth is, the media can completely shut down a roaring economy if they choose to.

“I think the biggest risk is that we talk ourselves into a downturn and we talk about it so much that we end up with a self-fulfilling prophecy,” Julia Chatterley, an anchor and correspondent for CNN International, says. “I do think there is a tendency, perhaps, for certain aspects of the financial media to be very alarmist.” Myles Udland, a markets reporter at Yahoo Finance, agrees. “People are weaponizing pretty benign economic data, which is leading to a lot of irresponsible bullshit in the business media world,” he says. “You call up an economist and you ask, ‘Do you think there is going to be a recession?’ And they are going to say something like, ‘It is possible in the next 18 months.’ So, your story is, like, economists say it is possible,” he explains. “If enough people just say the word ‘recession,’ then people start getting worried about a recession. The public sentiment around recession is influenced by the media, and that’s a very dangerous thing to get wrong.

Reality: the market can move a ton, but the economy doesn’t change overnight. Just because there is a bad day in the market - or one month of bad data - doesn’t mean there is a reason to run out and start talking about how bad our economy is – especially when it is actually really good. Yet, just the chatter has grave impact. It is a bit scary that the media has that much power.

In response to recent volatility in the stock market, rising prices (and declining yields) for U.S. Treasury bonds, and difficulties in the trade relationship between the United States and China, some pundits and politicians began forecasting a recession in the U.S., timed to coincide with the 2020 presidential election – how convenient is that, right? Are there people out there who actually want the economy to tank, the American people and businesses to suffer, in order to gain power in Washington? We’ll let you answer that question.

So, what should we do when we hear the chatter?

Listen, but verify.

Do not use a news jockey as your forecaster. Take a deep breath. Look at the economic numbers yourself, plus the forecasting, and make some decisions based on that.  And yes, watch those around you, because unfortunately if they drink the Kool-Aid, you will be impacted.

What has been your experience? Would love to know.

Joe Bouch

CEO, 78Madison