Economy Daily

We will narrowly avoid a recession now, a shock will tip us over the brink

Rachel Siegel, 11-29, 22, Washington Post, Almost everyone expects a recession. Could the economy avoid one?, https://www.washingtonpost.com/business/2022/11/29/economy-recession-federal-reserve/

“With baseline growth that’s only modest growth over this year and next, negative shocks to the global economy, or to our economy, clearly could tip us into a recession,” New York Fed President John Williams told reporters on Monday. “I hope that’s not the case. But that’s clearly a risk out there given all the uncertainty in the global economic outlook.” How the Fed’s rate hikes slow the economy — and impact you For now, though, observers see more and more reason to hope that a painful recession may not come. Last week, the Organization for Economic Cooperation and Development, an international group, said the global economy should avoid a recession next year, though European economies will still slow significantly as Russia’s invasion of Ukraine continues to send energy prices spiking. Earlier this month, Goldman Sachs’ chief economist put the odds of a U.S. recession in the next year at 35 percent — far below other forecasts so far. The thinking is that growth will slow but remain positive; the labor market could avoid massive layoffs; wage growth could simmer down; and inflation could be on a path to more normal levels. “We still see a very plausible, non-recessionary, four-step path from the high-inflation economy of the present to a low-inflation economy of the future,” Goldman’s Jan Hatzius wrote in an analyst note. The labor market and consumer spending have yet to crater despite the Fed’s rate hikes. Employers added 261,000 jobs in October, edging down after growing like gangbusters in the first half of the year, but still showing overall strength. Employers remain desperate to hire: the number of job openings rose in September compared with the month before, to 10.7 million. Where’s the economy headed? To quote the Fed chief: ‘Hard to say’ Consumer spending — which usually makes up 70 percent of economic activity — is also robust as the holiday season gets underway. Retail sales rose sharply in October, according to the Commerce Department. Shoppers are paying higher prices for basics like gas and food. But they also continue to spend on items like cars, furniture and dining out. Consumer sentiment has also improved since plummeting over the summer, when gas prices topped $5 per gallon. Prices at the pump have steadily ticked down, and on Monday, the national average was $3.54 per gallon, according to AAA — down more than 10 cents per gallon from the week before, but still higher than this time last year, before the Ukraine war. Corporate earnings calls have also gotten more upbeat. According to research by FactSet published Nov. 18, the number of S&P 500 companies citing the term “recession” on earnings calls in the third quarter dropped by 26 percent compared with the second quarter.

Recession now

Larry Kudlow, 11-22, 22, https://www.foxbusiness.com/media/larry-kudlow-americas-economy-jeopardy, Larry Kudlow: America's economy is in jeopardy

I got to tell you, I see a number of important indicators that are all pointing to recession. I don’t like this, but that’s what I'm looking at. We may already be in a recession, but next year looks like an even deeper downturn. Now, there's a way out of this mess, and I'm going to get to that in a few moments, but first some straightforward empirical factoids. I begin with a huge drop in the conference board's leading economic indicator. This is a very old-fashioned series, but it is a highly accurate forecasting tool. It’s got interest rate spreads, consumer expectations, manufacturing, stock prices, building permits for new homes and other measures. There are 10 in all and, as you can see by the chart, the rate of change is absolutely plunging. Second, maybe a more controversial indicator, called M2 — which is an inadequate measure of the nation's money supply, but still something to pay attention to. It was pioneered by the great Nobel Prize winner Milton Friedman. This is a monetary interpretation of the economy and it tells us about future inflation and growth. You can see by this chart that, for 20 years, M2 was basically growing modestly, that had something to do with a 2% average inflation. Not everything, but something to do with low inflation. Then we come to the craziness of the last two years, with a massive increase in federal spending that led to an equally massive money printing by the Federal Reserve. This was the single biggest mistake by Joe Biden. It moved the inflation rate up from about 1% to nearly 10%, because of that, real wages have fallen 18 consecutive months. That is the soft underbelly of the Biden economy and now, as the Fed makes its belated correction for its own prior mistakes, the American economy is in great jeopardy. This all could've been avoided, but it wasn't avoided and now here we are, with the threat of a difficult downturn next year. One that probably began this year, but Milton Friedman argued that inflation is too much money chasing too few goods — and, oversimplifying a bit, Uncle Sam created the money and then overregulation, tax increases and of course the war against fossil fuel production all created tall barriers to the production of goods. Yes, we had a COVID supply-chain hangover, yes, there's Vladimir Putin invading Ukraine, but the bulk of this economic mess is homegrown based on the policies of big government socialism and central planning on a grand scale. Besides the leading indicators and the money supply, just to add one more: The bond market has turned upside-down on its head with short-term rates now much higher than long-term rates. A very useful recession forecasting model that was developed years ago at the New York Fed and has a very high degree of accuracy. Basically, when the three-month T- bill exceeds the yield on the 10-year Treasury bond, the probability of recession one year hence goes higher and higher. Right now, the three-month bill is now 4.30, and the 10-year is 3.80. This is a very alarming sign. Now, there are a lot of other indicators I could point to: big housing downturn, a major slowdown in manufacturing, I don't want to get any deeper in the weeds than I have to. No model is perfect, but I will suggest that keeping an eye on the leading economic indicators and M2 and the Treasury yield curve gives everyone a pretty decent sense of where we're headed. So, inflation will come down slowly, but the recession may be very difficult.

Economic downturn structurally inevitable

EL-Erian, 11-22, 22, MOHAMED A. EL-ERIAN is President of Queens’ College at Cambridge University. He also serves as Professor of Practice at the Wharton School, Senior Global Fellow at the Lauder Institute, and an adviser to Allianz and Gramercy Funds Management, Not Just Another Recession Why the Global Economy May Never Be the Same, https://www.foreignaffairs.com/world/not-just-another-recession-global-economy

To say that the last few years have been economically turbulent would be a colossal understatement. Inflation has surged to its highest level in decades, and a combination of geopolitical tensions, supply chain disruptions, and rising interest rates now threatens to plunge the global economy into recession. Yet for the most part, economists and financial analysts have treated these developments as outgrowths of the normal business cycle. From the U.S. Federal Reserve’s initial misjudgment that inflation would be “transitory” to the current consensus that a probable U.S. recession will be “short and shallow,” there has been a strong tendency to see economic challenges as both temporary and quickly reversible. But rather than one more turn of the economic wheel, the world may be experiencing major structural and secular changes that will outlast the current business cycle.