Economists See Recession Coming, So Maybe It's Not

Economists See Recession Coming, So Maybe It’s Not

The writer is president of Rockefeller International

Economists tend to think in small incremental steps, missing big turning points in history, which helps explain why their consensus view had not predicted a single U.S. recession since records began in 1970. – until now.

For the first time, economists as a group not only expect a recession in America next year, but give it a very high probability, over 60%. Given their track record, it’s worth asking whether consensus is, in fact, unlikely.

With inflation at its highest level in four decades and central banks raising rates aggressively and in a way that has rarely been so well telegraphed, a recession seems inevitable. Yet, as John Maynard Keynes once warned, “the inevitable never happens and the unexpected always happens”.

The case of the unexpected scenario – no recession in the coming months – would start with a rapid drop in inflation. This would allow the Fed to forgo further tightening. Just when the consensus has come to accept that inflation will be higher for longer, and not “transient” as previously assumed, easing supply chain bottlenecks could lower inflation. inflation faster than expected.

Signs include falling freight prices, shortening delays at ports and a sharp drop in the Fed’s “supply chain stress index.” China’s economy is in the doldrums and is exporting slower inflation to the rest of the world. Goods inflation is slowing, with prices for everything from used cars to energy now down.

Many still assume that, because an unusually tight labor market is driving up wages at a rapid pace, the Fed will have to act as it did in the early 1980s under Paul Volcker – raising rates aggressively and avoiding an inflationary spiral of wages and prices by inducing a recession.

But for now, the US economy still seems far from recession territory. The weak growth of the first half of this year disappeared in the third quarter, when US GDP grew at an annual rate of 2.6%. Disposable income keeps pace with inflation, encouraging healthy growth in consumer spending. Travel spending is higher today than on the eve of the pandemic.

The private sector is also spending, with business capital expenditure growing much faster than business revenues and profits. The jobless rate also remains very low at 3.7% and has barely budged despite all the Fed tightening. None of this is what one would expect on the eve of a recession.

The tight labor market is pushing wage inflation higher, but some analysts hope that with job vacancies straying significantly from all-time highs in March this year, wage growth will also slow shortly. The public expects inflation to fall back into the low single digits, not to stay stuck in the double digits as it did in the 1980s. So today it there is less pressure on the Fed to keep raising rates.

Lower inflation would further bolster the confidence of US consumers, who are in an exceptionally strong financial position. Bank deposits have ballooned during the pandemic, and $2.5 billion of that cash is still in banks. Personal net worth is still about $25 billion higher than before the pandemic. The debts that imploded during the Great Recession of 2007-2009 have largely disappeared: Today, nearly 70% of homebuyers have FICO credit scores in the upper tier – over 760 – compared to 20% before the crisis.

While we have been conditioned to expect economic shocks to be negative, there is always the possibility that a “bluebird” event will bring unexpected joy. A warm winter or peace in Ukraine would reduce energy bills, help slow inflation and boost economic growth.

It’s not the most likely scenario and compared to economists, who typically call recessions months after they start, markets have a good track record when it comes to forecasting. While markets can send false signals, showing tremors before downturns that never come, they also consistently anticipate real downturns. Since World War II, the US stock market has typically fallen at least 20%, and bond traders have consistently pushed short-term yields above long-term yields in the months leading up to a recession. Both of these market signals warn of a recession now, so imagining alternative outcomes can be magical thinking.

Yet when the consensus is so strong, anchored by economists whose recession forecasts are so poor, it’s hard not to think of this quote from Keynes. The unexpected is a constant in the markets and in the economy, which suggests that we should at least consider the possibility that a recession is not inevitable.

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