It seems like “everyone” these days is saying we’re going into recession.
So: are they right?
I’ve covered markets and the economy for four decades, and I don’t remember a time when more people — or at least forecasters, economists, and bankers — were more certain that an economic downturn was imminent.
And if so many people think a recession is inevitable, does that make it, well, inevitable? Or does it mean that there will be no recession? Or that any recession will be at least mild in nature? Ask this question enough and we quickly get to the territory of the night bedroom: what is the economy?
But our main economic problem right now is clear: inflation stands at 8.6% and the Federal Reserve is fighting this by raising interest rates. What provoked this inflation attack is mainly related to VOCID, while the war in Ukraine added supply chain challenges and pressures on goods.
Rising rates make car loans and mortgages more expensive, which should moderate demand. And as Fed Chairman Jerome Powell told lawmakers this week, “I’m trying to slow demand growth. We don’t know demand needs to go down, which would be a recession.”
Federal Reserve Chairman Jerome Powell testifies before a hearing of the Senate Committee on Urban Affairs, Banking and Housing on Capitol Hill in Washington, DC, USA, on June 22, 2022. REUTERS / Elizabeth Frantz
“There were times in the 60s and 70s when people could see the Fed raising interest rates and cause a recession to reduce inflation and I think we’re possibly in that kind of situation,” says Laurence Ball, a professor. of economy. and Johns Hopkins. “I think the risk of a recession is now greater than at any time in the last 40 years. There has been a recession in the last 40 years, but they were not things that could have been predicted.”
In my opinion, however, recessions can be mild and brief if the causes are anticipated and less systemic, and more severe and longer if they are unexpected and less intertwined with the central economy.
Let’s look back at some recent falls to describe these dynamics.
Sample A is the recession of COVID-February 19-April 2020. Not only was it the shortest recession in U.S. history, or at least dating back to the early 1800s, this fall was, with a 19.2% drop in GDP growth, the largest drop in output since the Great Depression.
The story goes on
Because? Because the cause of the recession, the COVID-19 pandemic, was completely unexpected. This event (almost) literally shut down the economy, but in a fairly short time, we figured out how to deal with it, stimulated growth with spending packages, and the economy bounced back.
Exposure B is the financial crisis, which triggered the Great Recession.
This fall was triggered by the subprime mortgage crisis and lasted from December 2007 to June 2009, the longest fall since the Great Depression. The accompanying 5.1% of GDP fall is not large compared to the COVID recession, but it remains one of the strongest falls since World War II.
And with the labor market taking years and years to repair after the financial crisis, the scars of this fall and slow recovery continue with us today.
Leaving aside Michael Burry, Steve Eisman and a few others, most people did not see a financial crisis in the mid-2000s. I would say the surprise factor here was high, which exacerbated the severity of this recession.
Exposure C is the recession of the early 2000s, caused by the two-point blow of the collapse of the knit bubble as and on 9/11. This recession lasted eight months — March-November 2001 — and the cumulative fall in GDP production was only 0.3%. Therefore, neither so long nor so deep.
Because? Well, maybe because people were warning a lot about the tech bubble before the accident. In addition, the fall in technology removed a lot of stock market value, but job losses across the economy were relatively modest. As for 9/11, it was a shock no different from COVID, from which we withdrew.
So what does all this mean for our current economic situation?
Well, one part is easy. Or, easier. As I pointed out above, everyone and their mom are calling for a recession now, so any recession would be expected.
But what about systemic challenges? How deep are the underlying causes of this possible slowdown?
“I think something important has happened,” says Robert Shiller, a professor of economics at Yale. “People are really thinking about inflation and the rates that were typical of the high inflation of the 1970s. People are suddenly scared. “
Gas prices are announced at a Chevron station as rising inflation and oil costs affect consumers in Los Angeles, California, USA, June 13, 2022. REUTERS / Lucy Nicholson
I would suggest that the outstanding challenges of the economy are more difficult than 9/11 or even COVID. Although, perhaps paradoxically, COVID is partly to blame for our current economic problems.
The real question, then, is to what extent is there a real economic problem? I would argue, not so much.
We are learning to deal with COVID and there are indications that supply chain problems are shrinking, including car chips, especially when China comes out of the blockade. Also, let’s not forget that two major deflationary forces have not disappeared: technology is still reducing costs and our population is aging.
As Paul Krugman noted in a recent Times opinion piece: “When the working-age population grows slowly or even shrinks, there is much less need for new office parks, shopping malls, even all housing, therefore weak demand … there are many reasons why we believe that we will soon return to an era of low interest rates. “
We need to work with COVID and supply chain problems, and then technology and low secular demand, for better or worse, will do the rest. As for the labor shortage, with the help of the government running out and the stock market low, I would anticipate that this issue will also continue its course.
I think this means that if we have a recession, it will be relatively mild and will not surprise anyone. Any recession that occurs should not be too long either.
Of course, part of that is pure speculation. Or maybe an illusion. But when have economists, or columnists, never stayed?
This article was presented in a Saturday edition of the Morning Brief on June 25, 2022. Receive the Morning Brief directly in your inbox Monday through Friday at 6:30 am ET. Subscribe
Follow Andy Serwer, editor-in-chief of Yahoo Finance, on Twitter @serwer
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