Paul Krugman asks today:
Hang on a second, pardner. There's also a third option: a plain, old-fashioned recession that lasts a year or so. This is my best guess right now because the Fed's interest rate hikes will start to affect things in a few months and drive a normalish economy down into recession.
I might be wrong about this, of course, and it's hard to stick to your guns when you're relying on an invisible force to explain things. Maybe this time will be different! For now, though, I can't think of any good reason why it should be. Invisible or not, interest rate hikes cool off an economy, and we're already about where we'd like to be. When last year's hikes take effect, the economy will respond in the usual way: by dropping below where we'd like to be.
Generally speaking, I think I'm more confident about sticking to fundamentals than most people. I hope I'm wrong about an upcoming recession, but ordinary old fundamentals tell me it's coming. We'll see.
Given that higher rates primarily act on housing/auto/manufacturing employment first, is it different this time because the US has significantly less employment (as % of total employment) in those areas than in past Fed driven slowdowns?
If those sectors play less of a role in the economy than they did in the past, we should expect different results.
?
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It'd be easier to discuss your 12-month(ish) prediction of a recession if you gave your reasoning. As it stands, it feels more like an arbitrary value with nothing to support it.
The average post-WWII recession lasted 10 months -- lower if you exclude the Great Recession -- which suggests that you think we're going to have a bigger than expected recession.
Assuming you remain confident that inflation continues to decline, then stagflation seems an unlikely driver for a prolonged recession.
So, is this just you expressing a belief that the Fed will be slow to react to two straight months of declining GDP?
Or...?
the Republicans in Congress will kill any relief programs and kill what spending in already approve to make the economy worse....so they can blame Biden in 2024....
That's why their stunt with the debt ceiling is so dangerous.
"so they can blame Biden in 2024....That's why their stunt with the debt ceiling is so dangerous."
Well, to be fair, the stunt with the debt ceiling is so dangerous not because it might hurt Biden in 2024, but because it could crash the global financial system and forever destroy confidence in and the utility of US bonds. The Biden 2024 aspect may be what Republicans are focusing on, but it's a very, very minor aspect of the actual risk at play here.
trump or any republican winning the presidency in 2024 is also extremely dangerous. i'd say possibly even more so than the immediate impacts of the debt default.
Trump DID win the presidency in 2016, and while it was bad, it was not as bad as a debt default.
Arguing that a debt default would be bad because it might mean a Republican president in 2025 is like arguing that letting a nuclear reactor meltdown occur now is bad because it might mean a new plant manager in the future who will be bad at managing the plant.
trump attempted a violent coup to overthrow the democratically elected president last time he was president. the fact that it failed is of little assurance to me about the possible horrors if he wins again. a debt default pales in comparison to the long term outcomes i can imagine as plausible.
Trump is not ".. a new plant manager in the future who will be bad at managing the plant..." He is a fascist that wants t o eliminate democracy (and honesty and decency and genrousity and so on) from the US.
Other republicans less dangerous.
yup. the framing of trump as "a new plant manager" is absurd.
GOOD
To be absolutely clear...
people (except perhaps Silicon Valley folks) have (thankfully) gotten over the sky-is-falling panic that Larry Summers set off. Wall Street economists are now suggesting things may not be quite as dire as they signaled last year,...
but here you are, going off about a full 4 quarter recession.
Do you see my confusion?
I think Drum's said here that he bases his prediction on fundamentals and he details those as well. I agree here that the fundamentals right now seem to be a mish-mosh that don't match leadups to previous recessions and that's the reason for doubt it will play out that way. The difference in fundamentals this time is the truculence of employment since the end of the pandemic a year ago. 160,000,000 people employed now and none in that number seem willing to go down easily.
I think the economy has reacted to the interest hikes faster than you expected.
Yes, but it is layered....
Housing sales take a hit fairly early as mortgage payments shoot up and people are loath to lower selling price much. And new home construction drops.
Then appliance sales drops since new homes are not being constructed. When people buy existing homes, they tend to renovate a bit too. Of course if buying a different home costs too much, they may renovate their current home--presuming they own it. Or not if they try to save up for a larger down payment.
Bubbles burst with interest rate hikes, so cypto nose dives. That's not a bad thing--but it does hurt people caught up in it.
Hiring falters. That can take some time and varies by sector. First a slow down in new hires, then layoffs. We're at that point now. Granted, the pandemic really did skew things a bit, and we're also now unskewing things so to speak...
Etc.
Of course this is outside my field, so I can be very dogmatic 😉
I don't think we can compare ANY upcoming recession to previous ones because the housing market was going to shrink due to lowered numbers of people buying houses to begin with.
Housing boomed after WWII as soldiers came home with money in their pockets and women left the work force to allow them to work. It took about 30 years but then the boomers those solders fathered came of home buying age during the 70s. Housing has been up and down since then but the overall trend is down.
I think that most folks who can, and desire to have a home have got one. Bezos, Allen and Gates have been buying up homes but even that will slow. There's just fewer people of home buying age now than there were in the 70s (when the boomers hit their 30s)
Because of all of this we will need to re-think the actual numbers of units built, or sold to lower out expectations as to what will happen etc.......
Japan is already expecting a recession based upon much lower birth rates of the last 30 years or so.....
Not to be too nitpicky, but a majority of boomers did not hit their thirties until the 80's and beyond . Even as late in the boom as 1964 there were more babies born than any year before 1950.
RZM
https://www.macrotrends.net/countries/USA/united-states/birth-rate
According to this site the birthrate in 1950 was 24.2687 per thousand people
In 1964 the birthrate was 20.336 per thousand people
In 1990 the birthrate was 15.573 per thousand. Those folks would be in their early 30s which historically was prime home buying age.
Keep in mind that world wide birthrates were higher in 1964 than in 1950 but here in the U.S. the birthrate was already in a decline.
In 2022 the birthrate was 12.012 per thousand
In 1950 again the rate was 24.268 per thousand. As the boomers die off there will be far fewer people to replace them. And this problem is not going away any time soon.
Society will have to adjust to lower demand for just about everything which will reduce profits for just about every business.
This is a remarkable decline over the last 3/4 of a century and it's one that will impact a LOT of different things.
Oh and I am one of those posters who doesn't mind being wrong about something so feel free to nitpick. I really don't mind.
I once said to the Mrs "I learn from my mistakes". To which she replied "If you had learned from every mistake you've made you'd be a genius by now - and you're not even close to that........"
I DO love that woman........
I assume you that by "the overall trend is down" in housing, you mean construction?
No, it was pretty noisy but basically flat from the 50s until the late 90s/early 00s (or perhaps very SLIGHTLY down). That completely squashes your boomer babies in the 70s theory.
https://fred.stlouisfed.org/graph/?id=HOUST,
It then bubbled up, then cratered in 2007 and has never recovered. We've lost more units that should have been constructed under the long-term trendline than were ever overbuilt during the bubble. We're still millions of units behind the trend.
I think the economy has reacted to the interest hikes faster than you expected.
In fact there's a school of thought—not some outlierish cohort of economists but a significant group—that believes the role of market expectations has increased in recent times, thereby reducing the lag between monetary policy and impact on economic conditions. Kevin hasn't even acknowledged the existence of this mainstream view (it's not necessarily the majority view, but it's widespread enough, I think, to be regarded as "mainstream").
Mind you I'm not saying Kevin's wrong. As I understand it his view—that there's a significant time lapse between an interest rate hike by the Fed and the impact of that hike on the economy—is the orthodox view. But I think it's more along the lines of 60-40 than 95-5. Here's a paper out of the Kansas City Fed arguing that lags in the effects of monetary policy have indeed shortened due to the role played by expectations:
https://www.kansascityfed.org/research/economic-bulletin/have-lags-in-monetary-policy-transmission-shortened/
Matt
I think you might be on to something
Pre-internet the FED raised rates and the news was slow to spread. With the internet the news was instantaneous. Now with all these financial pundits on the internet just the THOUGHT of a rate hike or a cut will drive the stock market nutz. And many companies are paying close attention to the FED so as to reduce their costs should a serious slow down happen. I would suspect that places like Lowes and Home Depot make long range inventory purchases with a keen eye on what they BELIEVE the housing market will be like 6 months to a year down the road.
Its now how rates are perceived rather than what they are doing
Oh, I don’t know, fundamentalists and evangelicals and such seem to do so without much difficulty.
We will always have Eve!
And I'll bet that's not her real picture either.
It’s just proof that poor people are poor because they are lazy. Look how easy it is to make $10k to $20k per week without even leaving home. No wonder Republicans hate welfare.
Isn’t that a picture of Anna de Armas from a Vogue or VF shoot? I can’t find the specific picture, but it looks like her.
Never heard of Anna before so googled it. Yes I believe Eve is the imposter of Anna de Armas. Anna, my guess is she makes much more then Eve
No idea about recession or not, but expecting overshoot is always a good bet when considering economics or finance.
My pushback on this is that although the Fed has raised interest rates, the rate is still not that high relative to the past. Wasn't the rate above 5% for most of the 90s without causing a recession? And they were super high in the mid-80s during the Reagan-era growth period. I guess I am expecting people to start buying and selling houses again in the spring even if 30 year mortgage rates are 6%. You can always refinance if rates go back down to 3%. https://fred.stlouisfed.org/series/MORTGAGE30US
I tend to agree. The segment of the economy that gets destroyed without zero interest rates is startups and crapto. At around 6 percent housing and autos get killed. 4% to 5% should not really hit the real economy too hard. My first mortgage was 7.375. It didn’t stop me.
I think the rate hikes take effect faster these days.
I'm with you Kevin. The feds timing is so "off" ... they respond way before their last hike had tome to take effect. Idiocy. We all know there is a time lag.