My economic forecast for 2018 is moderately positive, as I explained in recent articles detailing predictions for consumer spending, housing, and business capital spending. But things could go wrong, even so far as a recession. Anyone who is absolutely convinced that we cannot avoid a recession this year is far too overconfident in his or her ability to understand the economy. The same is true for anyone who thinks a recession could not possibly begin this year. In short, we live in an uncertain world.

 Dr. Bill Conerly based on data from The Wall Street Journal

Estimated risk of a recession beginning in the next 12 months.

The risk of recession, according to economists surveyed by The Wall Street Journal, is 14 percent, or roughly one chance in seven. For guidance on predictive accuracy, consider that in the month before the last recession began, economists gauged the risk at 38 percent. The 14 percent risk is much below 50-50, but certainly high enough to warrant contingency planning.

How could we head downhill in 2018? The easy answer is always geopolitical instability. War with North Korea would trash the economy in short order, despite the few old Keynesians who claim that war is good for the economy. A major Middle East crisis could trigger recession here in the United States, but we are so used to minor Middle East crises that it would take a really major one to shake us up. Russia messing with its neighbors enough to provoke a NATO response could also be recessionary.

The more likely cause of a downturn this year is a sharp cutback by consumers. I cautioned in my earlier consumer spending forecast that growth of spending is significantly greater than growth of incomes. There are always grumpy people complaining that others are spending beyond their means, but the aggregate data don’t support that hypothesis. However, over the course of 2017, the savings rate has dropped as consumers’ lower income growth did not trigger slower spending growth. And note this discussion is about growth rates, not the actual level of spending. I think it’s likely consumers will cut back a little, with a risk that they cut back a lot. The usual trigger of spending reductions is loss of jobs—not happening lately, and not going to happen unless something else is the cause. Consumers might also cut back on spending if interest rates rise sharply, though that does not seem likely. Attitudes might turn negative if there were some precipitating factor—but what could that be? Consumers have watched the country’s politics turn increasingly acrimonious, have watched a hugely divisive president, and have seen Oklahoma lose the Rose Bowl, and yet all the recent indicators of attitudes remain elevated.

Capital spending seems particularly unlikely to trigger a downturn, given the new business tax cuts. Housing construction is not overly strong, running well below previous peaks. Exports could drop, reversing the trend of the past two years, but probably not by enough to cause a decline in the overall U.S. economy.

The Federal Reserve’s tightening last month and over the course of 2018 could prove to be mistaken, choking off interest-sensitive investment. Monetary policy, though, did not seem particularly powerful when quantitative easing was first implemented. And the tightening that occurred over the past 13 months doesn’t seem to have dampened economic growth at all. Still, the risk is there.

The stock market appears to have priced in all possible good news, and a little disappointment to investors could prompt a sell-off. The impact of the stock market on the economy, though, is usually much smaller than the reverse: how the economy affects the stock market. The channel of causation usually works through business capital spending, which is weak when stock prices are low. (Learn more in Chapter 11 of Businomics.) This historical track record of the stock market affecting the economy, rather than vice versa, is pretty spotty.

None of the potential causes of a 2018 downturn seem very strong. However, a number of small probabilities does add up to a bigger probability of something going wrong.  In my own estimation of the risk of recession, I’m throwing in some caution based on the track record of economists in predicting recessions. We have not done a very good job in the past, so we should be humble about whether we’ll see the next one coming. To learn how to handle the risk of recession, watch my five-video series Business Planning With Risk of Recession.