I've been fairly outspoken on my opinion that the US is not in, and likely will not enter, a recession this year or next. I'll argue for that point again today, in light of oil at $137/barrel, but first I want to address an important issue in psychology. Other people (not me!) are susceptible to getting so invested in a belief that they begin to view new information that tends to either confirm or disprove that belief with what psychologists call "confirmation bias"--that is, they discount information that goes against their belief as either insignificant or biased, and see information supporting their belief as credible and weighty. Since, to the best of my ability to investigate, I seem to also be similarly wired as a human who evolved the ability to think rationally on top of (primate/human brain, mostly prefrontal cortex), not in substitute for, my ability to think reflexively (reptilian/fish brain), it seems that I may be susceptible to the same hard-wired tendency to engage in faulty reasoning! Fortunately, thanks to my awareness of my own limitations, I'm trying to review my opinions here with extra care to identify exactly that kind of bias. Take it for what you will--I think I'm presenting this information as objectively as I am capable, which may or may not be very objectively objective. Fortunately, I seem to have been modestly but consistently right with regards to my predictions to date (2006 2007 2008), but, again, I need to remind myself that correlation between my predictions and reality does not necessarily prove that I am anything more than a highly biased and highly lucky person :)
So, given my attempt to look at the situation without confirmation bias, how can I still think that we're not in for a near-term recession when so many economists are worried about the impact of high energy prices, when so many pundits think that the economy simply can't survive on $5 gas (or $6 gas or $10 gas)? First, I think that our current media/pundit complex is very, very biased--much more so than me (confirmation bias?). Second, I can remember strikingly similar calls that the economy would collapse at $3 gas, at $4 gas, at $60 oil, and at $80 oil (and even that $40 oil would have serious negative effects). The key to discounting these renewed calls is in following the money. What happens when we pay $5/gallon for gas? Where does the money go?
Well, as a net-importer of oil, much of that money goes overseas. Where it is spent. Generating economic activity. The portion of that money that goes to domestic oil producers stays in the US, where it is spent. Generating economic activity. This is the key: high energy prices alone do not lead to recession, but rather to reallocation. While the two may feel the same if you're one of the people who's money is being reallocated out of your pocket and into the hands of Exxon or ARAMCO, they're very different animals. Recession is an aggregate decrease in economic activity. It means less opportunity overall. Reallocation, on the other hand, is not an aggregate decrease, but rather a shifting of who gets the benefit and who gets burned. It means the same--or even greater--opportunity, but in different places and in different manner than in the past.
Therefore, this is my working theory: the US, along with the global economy, is not facing a recession, but rather a reallocation. I don't think that actual economic activity will decline until actual energy availability declines (something that might not be too far off). Until that begins to happen--when we're just facing increasing prices, but not yet declining availability--we will instead see reallocation. Take a look at this graph from the latest edition of BusinessWeek:
Overall, the US economy grew at an annual rate of 0.9% in the first quarter of 2008 (yes, you can legitimately dispute those numbers due to inflation, etc.--I certainly do--but I'm looking at the official numbers so that I can compare apples to apples). Excluding autos and housing--two areas on the losing side of economic reallocation--the economy grew at nearly 4%, which is higher than the optimist's expected long-term growth rate for the US.
What to do in the face of reallocation? Reallocation hurts the most those who are not expecting it. Expect it to continue, and to intensify. Don't follow the moronic investment advice offered over at CNN Money, but rather try to tease out where the money will be reallocated to, and put yourself in position to take advantage of those new opportunities ("get yourself to the non-discretionary side of the economy," get linked to the energy economy, the local food economy, etc.). Reduce your exposure to having costs reallocated to you (e.g. by reducing commute times or transport modes, by establishing partial food self-sufficiency, by generating your own electricity/growing your own woodlot, etc.). Reallocation is change, but it is not necessarily "bad." If you're assuming that you can keep driving your F250 to work 20 miles away at the Ford plant, reallocation will feel--quite convincingly--like a recession. But that won't make the pundits who proclaim that we're already in a recession correct. It will just mean that they, like you, have fallen prey to confirmation bias and are mistaking reallocation for recession. Well, at least that's my opinion, subject to all the standard disclaimers of human thought processes.