Everyone is often caught off guard by recessions. The likelihood that the following one won’t is very high.
Since months, economists have been predicting a recession, which the majority believe will begin in the first quarter of 2019. The idea that the economy is entering a period of contraction is essentially the consensus view among economists, whether it is deep or shallow, long or short.
“Historically, when you have high inflation, and the Fed is jacking up interest rates to quell inflation, that results in a downturn or recession,” said Mark Zandi, chief economist at Moody’s Analytics. “That invariably happens — the classic overheating scenario that leads to a recession. We’ve seen this story before. When inflation picks up and the Fed responds by pushing up interest rates, the economy ultimately caves under the weight of higher interest rates.”
Zandi is one of the few economists who thinks the Federal Reserve can prevent a recession by raising rates just slightly longer than necessary without stifling growth. But he claimed that there are many predictions that the economy will tank.
“Usually recessions sneak up on us. CEOs never talk about recessions,” said Zandi. “Now it seems CEOs are falling over themselves to say we’re falling into a recession. … Every person on TV says recession. Every economist says recession. I’ve never seen anything like it.”
Ironically, the Fed is slowing the economy after saving it during the previous two recessions. By lowering interest rates to zero, the central bank encouraged lending and increased market liquidity by adding trillions of dollars’ worth of assets to its balance sheet. It has quickly increased interest rates from zero in March to a range of 4.25% to 4.5% this month as it unwinds that balance sheet.
Nevertheless, during those two most recent recessions, policymakers did not have to worry about high inflation eroding consumer and corporate purchasing power or spreading throughout the economy via the supply chain and wage increases.
Inflation is currently a serious issue for the Fed. It anticipates further rate increases up to about 5.1% by the beginning of next year, and economists anticipate it may keep those high rates in place to control inflation.
Home sales in November were down 35.4% from last year, the tenth consecutive month of decline, indicating that those higher rates are already having an impact on the housing market. Nearly 7% is the 30-year mortgage rate. Additionally, in November, consumer inflation continued to soar at an impressive 7.1% annual rate.
“You have to blow the dust off your economics textbook. This is going to be be a classic recession,” said Tom Simons, money market economist at Jefferies. “The transmission mechanism we’re going to see it work through first in the beginning of next year, we’ll start to see some significant margin compression in corporate profits. Once that starts to take hold, they’re going to take steps to cut their expenses. The first place we’re going to see it is in reducing headcount. We’ll see that by the middle of next year, and that’s when we’ll see economic growth slowdown significantly and inflation will come down as well.”
A recession is considered to be a prolonged economic downturn that broadly affects the economy and typically lasts two quarters or more. The National Bureau of Economic Research, the arbiter of recessions, considers how deep the slowdown is, how wide spread it is and how long it lasts.
However, if any factor is severe enough, the NBER could declare a recession. For instance, the pandemic downturn in 2020 was so sudden and sharp with wide-reaching impact that it was determined to be a recession even though it was very short.
“I’m hoping for a short, shallow one, but hope springs eternal,” said Diane Swonk, chief economist at KPMG. “The good news is we should be able to recover from it quickly. We do have good balance sheets, and you could get a response to lower rates once the Fed starts easing. Fed-induced recessions are not balance sheet recessions.”
According to the most recent economic projections from the Federal Reserve, the economy will expand at a 0.5% annual rate in 2023 and there won’t be a recession.
“We’ll have one because the Fed is trying to create one,” said Swonk. “When you say growth is going to stall out to zero and the unemployment rate is going to rise … it’s clear the Fed has got a recession in its forecast but they won’t say it.” The central bank forecasts unemployment could rise next year to 4.6% from its current 3.7%.
(Adapted from CNBC.com)