What Recession?
Dr. M. Ray Perryman, August 02, 2023
While we’re not out of the woods, opinions about the likelihood of recession are shifting away from the doom and gloom which has been prevalent over the past year. I have always felt that the talk was overblown and that the US economy would prove to be resilient even in the face of the action the Federal Reserve has taken to slow inflation.
In dozens of speeches and articles, I have repeatedly put the odds of a downturn at 35% or less from the outset. Most analysts thought a downturn was virtually certain, with one prominent and respected group putting the odds at 100% (I couldn’t resist pointing out that there wasn’t a 100% chance of anything in our complex economic universe). Recently, month after month of job gains even as target interest rates reached 22-year highs have led a growing number to become a bit more optimistic.
The Federal Reserve (Fed) has a dual mandate – to keep inflation low and employment high. Things were going pretty well until the pandemic. Between massive stimulus packages which increased demand and supply chain problems which made products hard to get, inflation became a major concern. In response, the Fed rapidly increased target interest rates and shrank its balance sheet to slow the economy and reduce inflationary pressures.
It’s a difficult challenge to try to manage the US economy. It’s a lot more like steering and braking a cruise ship than a sports car, and there are inevitably lags between actions and results. The urgency was justified; if people begin to assume that inflation will persist, it can become self-fulfilling and self-perpetuating as price increases become baked into contracts and wage negotiations.
Recently, a poll released by the National Association of Business Economists showed that 75% of its forecast panel no longer expect a recession in the coming year. In addition, the non-partisan Congressional Budget Office has backed off from its recession projection. Many prognosticators from various financial institutions have also backed away from their expectations of decline. Even the staff of the Fed itself now anticipates a notable slowdown, but no recession.
The reason to be encouraged is that inflation is slowing markedly without major disruptions to the labor market. Unemployment remains low, though job openings are falling somewhat and fewer people are quitting their jobs (a sign that they are less sure that they will be able to go out and immediately get another, better position). It’s good news that some of the overheating in the labor market is calming.
It’s still relatively early in the battle against inflation, and there are clearly some risks to be dealt with (a topic for another day). Nonetheless, things are looking up. Stay safe.