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We can’t put off a recession forever

The Wall Street Journal is skeptical about economic doomsaying:

I don't know about that. I'd put it at about five months right now. My read of the evidence is that the economy is in OK but fragile shape, and by summer a whole bunch of things are likely to coalesce. This will be triggered by the Fed's interest rate hikes, which will finally start to seriously bite, followed by declines in consumer spending thanks to exhausted stimulus savings and three years of flat wages. The housing slowdown will get worse and investment levels will crater. All of this will cause GDP to flatten and fall, followed by a significant rise in the unemployment rate.

But I could be wrong! I hope so.

18 thoughts on “We can’t put off a recession forever

    1. Ken Rhodes

      "...if a recession is going to hit..."

      So how will we know if a recession is going to hit? Well, one way is we could keep screwing the economy more and more until we finally force it to hit. Apparently, that's what we (the FED) seem to be doing, but they of course do not characterize it that way.

      Brief? Good luck predicting what that will be.

    2. Jasper_in_Boston

      For Biden, if a recession is going to hit, you want it to happen ASAP and be brief....

      This has been the case now for more than a year. I'd say at this juncture it's too late, and Democrats had better hope the next recession doesn't arrive until after the fall of 2024. Even if we were entering recession right now and it was lifting by the spring of 2024, people's perceptions of the economy (per my reading of Krugman) tend to have solidified by the midway point in the year.

      Because of the above I'm now putting the Democrats' odds of holding onto the White House at best about 50%.

    1. Jasper_in_Boston

      If it's practically a given that rate hikes take like a year to affect inflation

      That is no longer the case: there's considerable debate about this based on recent research. I haven't committed the details to memory, but IIRC some economists are now of the opinion that Fed action has a more immediate impact on investor and consumer sentiment than was once supposed.

      Even Krugman acts like the rate hikes already did their thing. It's very odd.

      Krugman's aware of the new research and has written about it.

      Kevin may be correct, mind you: the traditional view of a longish lag might be accurate. But I think there's at least reason to hope it's (he's) not, in which case I guess there'd be better odds we'll just have a growth slowdown (and lower inflation) instead of a full-blown recession. We'll find out sooner or later.

  1. cmayo

    I remain skeptical in the extreme that it takes a full year (or close to it) for rate increases to "start to seriously bite."

    Rate increases take effect immediately and percolate through the economy fairly quickly - not everybody buys a new car or takes out a loan right after the rate increases happen, obviously, but SOME people do. And as time goes on, even more of people do. This means that rate increases have a small but immediate effect and one that increases over time. There is no sudden "it's been a year, wow loans are expensive all of a sudden!" effect.

    On top of that, rate increases IMMEDIATELY impact consumer spending, particularly for a nation that relies so much on credit like we do. Savings are down to their pre-pandemic levels, last I saw, which means people are (probably) back to using credit to finance their purchases (i.e., consumer demand) at similar levels to pre-pandemic. Or they would be, except that interest rates are several percent higher now, which dampens that demand to some degree.

    Yes, long and medium term decisions that are impacted by interest rates may not have been impacted to a large degree yet, and that does take a timeframe measured in a year or multiple years to occur, but it's not like they're the vast majority of the economic activity. Our economy is fueled more by daily, weekly, and monthly transactions.

    All of that is not to say that I don't think the Fed really fucked up by (1) waiting too long to modestly raise rates and (2) raising rates too high too fast when they did finally start to do so.

    1. lawnorder

      You could analogize the effects of a change in interest rates to a wave. If the time of the change in rates is the trough, the effects of that change start immediately but it takes more than a year to reach the crest of the wave.

    2. Austin

      People typically go 5-7 years between car purchases and 5-30 years between home purchases. A lot of people will completely miss the rate hikes, if they and their spillover effects only last a few years. And the people most likely to miss the rate hikes are wealthier on average - they don’t rent homes or lease cars like the poor do and they can afford to keep the cars and homes they buy in good repair so they last longer.

  2. Joseph Harbin

    If you set up an account at the NBER website, the NBER will alert you the moment that it declares the next recession. I wouldn't hold my breath, though.

    The last recession lasted from February to April 2020. The NBER announced that recession on July 19, 2021 -- more than a year after the recession had ended.

    The recession to come may be old news before anybody knows it happened. Of course, the next GOP presidential nominee will feel obligated to call a recession even in the face of sub-4% unemployment, and half the country will believe him anyway.

    I don't know whether it matters if we have a recession or not. To most people, it matters if they keep their job and it matters what they pay at the pump. The rest of it is academic -- or political.

    If we do avoid a recession entirely, it will prove that most of the prognosticators don't know what they're talking about. That's a good enough reason for me to root against a recession. (But I'll be honest: I don't pretend to know.)

    Wall Street folk love it when economists are wrong. Some days, in fact, investors would rather look down on economists than make money. But right now I'd say investors are about as wrong as they have ever been.

    Going back the past 35 years, the average AAII Survey comes in at 33. The average right now: 3! That's the lowest score ever, worse than the dot-com crash, the GFC crash, the Covid crash. You'd think we were headed toward the next Great Depression. Nothing is certain, but it is far more likely that the low is in, and in the months since October the market has steadily been rebounding off the bottom. Why is everybody worried we're heading off a cliff? Because nobody knows anything.

    ETA
    I don't think if we avoid a recession that vindicates the Fed. I think that means that we have a robust enough of an economy to overcome their mistakes, which include raising rates too late, and then too fast and too far. Much of the critique of the Fed on this blog I agree with.

    1. Joseph Harbin

      During the 2011 debt ceiling negotiations, the stock market was down mildly, off less than 6% in the 3 months before an agreement was reached. It was after the agreement when the market plummeted, losing 7% in a day and 13% in the week that followed, while S&P downgraded the US credit rating. Interesting times.

      Impossible to say how things will play out this time. GOP disunity could mean an easier path through, or the crazy factor could make for a far worse outcome.

  3. D_Ohrk_E1

    This will be triggered by the Fed's interest rate hikes, which will finally start to seriously bite

    You keep saying this but the effects are cumulative over time. Your horizon keeps extending, which suggests that the earliest increases had negligible effects.

  4. ronp

    well at nearly age 60 with an asset allocation of 75% stocks and 25% bonds will I be ok to retire in May? This is all I care about!!! (ok world peace and poverty reduction for all as well).

  5. Dana Decker

    In 2016 when Hillary Clinton was ahead and expected to win, there was concern that we were "overdue for a recession" which would negatively impact her presidency. We had moved up from the depths of the 2009 recession and (mistakenly) thought the business cycle would reassert itself. But recovery from the bursting of a credit bubble appears to be much longer in duration - over 10 years (or more if not for exogenous events like COVID).

  6. Jasper_in_Boston

    The GOP is certainly going to do everything in its power to trigger a financial crisis based on its debt ceiling brinkmanship. So don't be shocked if that's the precipitating event.

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