Date: 2024-12-21 Page is: DBtxt003.php txt00025829
US ECONOMY
CONVENTIONAL WISDOM ... WHATEVER HAPPENED?
Could the Recession in the Distance Be Just a Mirage? ... Rising interest rates were widely expected to put the U.S. economy in reverse. Now things are looking rosier, but don’t pop the Champagne corks yet.
CONVENTIONAL WISDOM ... WHATEVER HAPPENED?
Could the Recession in the Distance Be Just a Mirage? ... Rising interest rates were widely expected to put the U.S. economy in reverse. Now things are looking rosier, but don’t pop the Champagne corks yet.
Workers sorting online purchases for delivery outside a UPS Store in New York.
As the labor market remains strong and inflation continues to ease, a relatively painless cool-down is looking possible.
Credit ... Amir Hamja/The New York Times
Original article: https://www.nytimes.com/2023/07/19/business/economy/economy-soft-landing.html
Peter Burgess COMMENTARY
I have to admit I am somewhat amused by all the articles about the US economy not behaving as economists and journalists predicted.
In the 1970s I was 30 something years old and in a fairly big job for my age ... specifically, early in the 1970s I had been assigned as both CFO and VP manufacturing for a company with some 1,300 employees that was urgently reorganising to address several years of appalling financial performance. This bad performance was aggravated by the global economic events of the 1970s including the 'OPEC oil shock' in 1973 which raised to cost of energy to American users by a factor of about 4!
Prior to this energy prices in the USA were the lowest in the world except for some of the main oil exporting countries mainly in the Middle East, and the USA was profligate in its use of energy both at the consumer level and in much of its industrial processes compared to Europe and Japan.
Later in the 1970s I became the CFO of an international shrimp fishing company based in the USA that was faced with a huge energy cost increase in all its 100+ fishing fleet. The company was faced with a quadrupling of our production costs at the same time that the global demand for our product ... essentially a luxury product ... had catastrophically declined.
My impression is that most modern managers ... and journalists ... who are younger than me who did not go through the 1970s as adults but only learned about it from books and academic study are broadly speaking completely unable to grasp what was going on. At some time later in the 1970s I wrote something to the effect that the economic scale of change that was happening in the 1970s was something bigger than what happened in all of WWII. Almost 50 years later, I stand by that rather grandiose idea because it does explain to a great extent why the great American optimism of the early post-war years has been replaced by a malignant American pessimism about the future.
Of course, the energy shock was not the only impactful event of the decade of the 1970s. There was the political turmoil of President Nixon and Watergate and the difficult aftermath with Presidents Ford and Carter. Militarily ... there was the fall-out from Vietnam. And economically, beyond energy, there were disruptions in the global economic system that confuse analysis more and more as time passes. By the end of the 1970s US interest rates exceeded 20% yet most of the important lessons from that time have not been understood very well!
Subsequent to the 1970s I have increasingly talked about the 'financialization' of the economy to the detriment of society and the environment. Both Ronald Reagan and Margaret Thatcher embraced this approach to economic management and though there was some commonality, the economic circumstances in the UK and the USA were very different and that must be understood but rarely is!
Peter Burgess
Rising interest rates were widely expected to put the U.S. economy in reverse. Now things are looking rosier, but don’t pop the Champagne corks yet.
Written by Ben Casselman and Jeanna Smialek
July 19, 2023
The recession was supposed to have begun by now.
Last year, as policymakers relentlessly raised interest rates to combat the fastest inflation in decades, forecasters began talking as though a recession — economic contraction rather than growth — was a question not of “if” but of “when.” Possibly in 2022. Probably in the first half of 2023. Surely by the end of the year. As recently as December, less than a quarter of economists expected the United States to avoid a recession, a survey found.
But the year is more than half over, and the recession is nowhere to be found. Not, certainly, in the job market, as the unemployment rate, at 3.6 percent, is hovering near a five-decade low. Not in consumer spending, which continues to grow, nor in corporate profits, which remain robust. Not even in the housing market, the industry that is usually most sensitive to rising interest rates, which has shown signs of stabilizing after slumping last year.
At the same time, inflation has slowed significantly, and looks set to keep cooling — offering hope that interest-rate increases are nearing an end. All of which is leading economists, after a year spent being surprised by the resilience of the recovery, to wonder whether a recession is coming at all.
“The chances of a soft landing are higher — there’s no question about that,” said Diane Swonk, chief economist at KPMG US, referring to the possibility of bringing down inflation without causing an economic downturn. “I’m more optimistic than I was six months ago: That’s the good news.”
The public is feeling sunnier, too, though hardly ebullient. Measures of consumer confidence have picked up recently, although surveys show that most Americans still expect a recession, or believe the country is already in one.
There is still plenty that could go wrong, which Ms. Swonk noted. Inflation could, again, prove more stubborn than expected, leading the Federal Reserve to press on with interest rate increases to curb it. Or, on the flip side, the steps the Fed has already taken could hit with a delay, sharply cooling the economy in a way that has not surfaced yet. And even a slowdown short of a recession could be painful, leading to layoffs that are likely to disproportionately hit Black and Hispanic workers.
“Soft is in the eye of the beholder,” said Nick Bunker, director of North American economic research at the career site Indeed.
Economists are wary of declaring victory prematurely — burned, perhaps, by past episodes in which they did just that. In early 2008, for example, a string of positive economic data led some forecasters to conclude that the United States had navigated the subprime mortgage crisis without falling into a recession; researchers later concluded that one had already begun. But for now, at least, talk of worst-case scenarios — runaway inflation that the Fed struggles to tame, or “stagflation” in which prices and unemployment rise in tandem — has been ceding the conversation to cautious optimism. Inflation F.A.Q.
1 of 5. What is inflation? Inflation is a general increase in prices, which will cause a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
2 of 5. What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
3 of 5. Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
4 of 5. How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
5 of 5. Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
“We have seen a huge string of shocks, so I can’t predict what the future will hold,” Lael Brainard, a top White House economic adviser, said in an interview last week. “But so far, the data is very much consistent with moderating inflation and a still-resilient job market.”
Inflation has come down.
Economists have become more optimistic for two main reasons.
The first is inflation itself, which has cooled rapidly in recent months. The Consumer Price Index in June was up just 3 percent from a year earlier, compared with a peak of 9 percent last summer. That is partly a result of factors that are unlikely to repeat — no one expects oil prices to keep falling 30 percent per year, for example.
But measures of underlying inflation have also shown significant progress. And consumers and businesses appear to expect price increases to return to normal over the next few years, which makes it less likely that inflation will become embedded in the economy.
Cooling inflation could allow the Fed to continue to slow its campaign of interest rate increases, or perhaps even to stop raising rates altogether earlier than planned. That could reduce the chances that policymakers go too far in their effort to control inflation and cause a recession by mistake.
“Things have been going in the direction you would need them to go in order for you to get a soft landing,” said Louise Sheiner, a former Fed economist who is now at the Brookings Institution. “It doesn’t mean you’re guaranteed to get it, but certainly it’s more likely than if inflation was still 7 percent.”
The job market has been resilient.
The second reason for optimism has been the gradual cooling of the labor market from a rolling boil to a strong simmer.
The rapid reopening of the economy in 2021 led to a huge imbalance between supply and demand: Restaurants, hotels, airlines and other businesses suddenly had hundreds of thousand of jobs to fill and not enough people to fill them. For workers, it was a rare moment of leverage, resulting in the fastest wage growth in decades. But economists worried that those rapid gains could make it hard to get inflation under control.
In recent months, however, the frenzy has subsided. Employers are not posting as many openings. Employees are not hopping from job to job as freely in search of higher pay. At the same time, millions of workers have joined or rejoined the work force, helping to ease the labor shortage.
So far, however, that easing has happened without a significant increase in unemployment. The jobless rate is roughly where it was in the strong labor market that preceded the pandemic. Some industries, such as tech and finance, have laid off employees, but most of those workers have found other jobs relatively quickly.
“Labor market overheating is diminishing substantially, to levels where it’s no longer so worrisome,” said Jan Hatzius, chief economist for Goldman Sachs.
Mr. Hatzius, who has long been more optimistic about the prospects for a soft landing than many of his peers on Wall Street, on Monday lowered his estimated probability of a recession to 20 percent from 25 percent. He said the recent progress in inflation and the labor market — as well as in consumer spending and other areas — suggested that the economy was gradually moving past the disruptio
ns of the past few years.
“We’re seeing the other side of the pandemic,” he said. “The pandemic created all of this enormous turbulence in economies, and now I think it’s going away, and to me that’s the overriding theme.”
Risks remain.
Still, many economists are less sanguine. Inflation, at least excluding volatile food and energy prices, remains well above the Fed’s 2 percent annual target, at 4.8 percent in June. And although the progress on inflation so far may have been relatively painless, there is no guarantee that will continue — employers that initially responded to higher interest rates by hiring fewer workers may soon begin cutting jobs outright.
“People taking victory laps declaring a soft landing I think are premature,” said Laurence M. Ball, a Johns Hopkins economist who last year wrote an influential paper concluding that it would be difficult for the Fed to get inflation back to 2 percent without a significant increase in unemployment.
Part of the problem is that the Fed has little margin for error. Act too aggressively to tame inflation, and the central bank could push the economy into a recession. Do too little, and inflation could pick back up — forcing policymakers to clamp back down.
Neil Dutta, head of economic research at Renaissance Macro, said he worried that the strong labor market would fuel a new acceleration in the economy, leading to a resumption of rapid price increases — an “inflationary boom” that reverses much of the recent progress.
“The next three to six months, the inflation dynamics will look pretty good — it will feel like a soft landing,” he added. “The question is, what comes after?”
Then there are the factors outside policymakers’ control. Oil prices, which soared last year when Russia invaded Ukraine, could do so again. Food prices could start rising again, too — a possibility that became more real this week when Russia canceled a deal to allow Ukraine to export grain on the Black Sea.
With the economy already slowing, even relatively small developments — such as the looming resumption of student loan payments, which will strain the finances of many younger adults in particular — could be enough to knock the recovery off course, said Jay Bryson, chief economist for Wells Fargo.
“The student loan thing is not, in and of itself, enough to cause a recession, but if you do have a downturn, it could be a kind of death by a thousand paper cuts,” he said.
Mr. Bryson still expects a recession to start this year. But he has become less certain in recent months. He recently asked the nearly 20 people on his team to write down how likely they thought a recession was in the next year. Answers ranged from 30 percent to 65 percent, with an average of exactly 50 percent — coin-flip odds for a soft landing that many people once thought impossible.
“Keep the Champagne on ice,” Mr. Bryson said. “Hopefully early next year we can start popping it.”
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