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Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

Lost in the debate over whether recession has started, is the observation that it doesn't matter much either way.
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Existing Home Sales courtesy of Trading Economics

Existing Home Sales courtesy of Trading Economics

Misplaced Recession Debate

Housing leads recessions and recoveries. What's on the way?

Much of the debate over "recession" is misspaced. I believe a recession started in May and that a third quarter of negative GDP is on the way. 

Some believe a third quarter of declining growth will mean a recession started in the first quarter. 

I peg recession to a decline in retail sales and a big crumbling in housing that both started in May.

It doesn't matter. What does matter is the shape of the economy going forward. And a fourth quarter of negative growth would not surprise me in the least.

History of Fed-Blown Bubbles

The Fed has blown three consecutive massive bubbles: The DotCom bubble, the housing bubble, and what's now widely called the everything bubble.

In each case, the Fed blew larger and larger asset bubbles. The wealth effect stimulated spending and borrowing. 

Low interest rates fueled a massive housing bubble again.

In the wake of the DotCom crash the Fed blew the housing bubble. In the wake of the housing crash and Great Recession the Fed started the Everything Bubble.

The Everything Bubble culminated with unprecedented pandemic stimulus, QE, and absurdly low interest rates.

De-Globalization Impact 

De-globalization is underway. A key ramification is higher inflation.

The fed no longer has the wind of globalization at its back pushing down prices. It has inflationary aspects of globalization blowing stiffly in its face. 

That's another reason to not expect the Fed to soon come to the rescue with QE and lower rates. 

For discussion, please consider De-Globalization: New Supply Chains Are Inefficient and Will Drive Up Inflation

Now what?

Expect a Long Period of Weak Growth

It's payback time for three consecutive bubbles. Expect a long period of weak growth, no matter how it's labeled.

This time there will not be bailouts. Nor will the Fed quickly reverse on interest rate policy out of fear of stimulating more inflation and unwanted demand.

Unless asset housing prices crash, the housing sector figures to be weak for a long time, with the Fed unable or unwilling to offer much assistance.

Housing tends to start and end recessions. But where is housing going if prices remain high along with 5+ percent mortgage rates?

An asset crash in general is likely. If so, the wealth effect impact on spending rates to be huge. 

What About Jobs?

  • The Covid-recession was very short, two months, not even a full quarter of declining growth. The pandemic was also accompanied by the greatest job losses in history.
  • I expect the opposite of the Covid-recession: A long period of weak growth accompanied by relatively strong unemployment numbers. 

Countless times over the last six months I heard jobs are are too strong for there to be a recession.

Such talk is nonsense. 

We may easily see three or four quarters of negative GDP with relatively strong jobs because we never fully filled the losses from the pandemic. 

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Employment Levels in Retirement Age Groups 

Employment Levels in Retirement Age Groups

Age 60+ Employment

  • In 2022: 22.09 Million
  • In 2008: 13.46 Million
  • In 1999: 8.22 Million
  • In 1981: 7.21 Million

There are over 22 million people age 60 or over who are still working. We have never seen anything like this before, so don't expect prior recessions to be a model for this one.

Millions of these people will retire. Employment may drop substantially when these boomers and Gen X employees retire, but falling employment and rising unemployment are not the same thing.

I'm Calling BS on the Second Straight Amazing Jobs Report, Understanding Why

Nonfarm Payrolls and Employment Level 2022-07A

On August 5, I commented I'm Calling BS on the Second Straight Amazing Jobs Report, Understanding Why

Although I expect jobs (more specifically unemployment) to be strong in this recession, the numbers don't jive.

Synopsis Since March

  • Employment -168,000
  • Jobs +1,680,000

That's a bit much and I smell revisions or wild data swings one way or another coming up. 

Another possibility is overcounting jobs while undercounting retirements. As of January, there were 22 million people of retirement age still working. 

Fed's Hands Are Tied

The Jobs data speaks for itself. That is half of the Fed's mandate. If jobs (unemployment) is relatively strong as I expect, the Fed will have met that half of its mandate.

The Fed's other mandate is price stability. Everyone on the planet knows the Fed flunked. It gets grade F.

The Fed does not want another grade F. It will err on the side of caution unless there is a credit event or huge rise in unemployment.

De-globalization, asset bubbles, and fear of inflation add up to a fed reluctant to cut. Higher rates and high housing prices will not stimulate that important cyclical aspect of the economy. 

Cyclical Components of GDP, the Most Important Chart in Macro

If you missed it, please note Cyclical Components of GDP, the Most Important Chart in Macro

My follow-up article was A Big Housing Bust is the Key to Understanding This Recession

Housing leads recessions and recoveries and housing rates to be weak for a long time. 

Add it all up and you have the opposite of the Covid-recession, a long period of economic weakness with minimal rise in unemployment.

It does not matter whether you label this a recession or not. Besides, the NBER might not even announce the recession until it's over. That happened once already.

This post originated at MishTalk.Com

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