Regarding Recession, I Remain Undeterred
Regarding Recession, I Remain Undeterred
Bruised, but undeterred
Ok, ok, I have a premature recessionation problem.
Like so many economists, I had expected the economy to falter by now. Yes, there were two consecutive quarters of negative GDP growth to start 2022 (EDIT: about two hours after we published this, they revised the data so that there were not two consecutive quarters of negative GDP growth), but that’s not how recession is technically defined. The fact of the matter is that my prognostications have yet to come true.
Incorrectness has many names, let me count the ways
The consumer
By far, this has been the largest source of forecasting error for yours truly. I was thinking that with interest rates so high, especially on credit cards, consumers would slow down their spending. I must have confused normative considerations (they ought to slow their spending) with practical ones (they are Americans, they will just keep spending). And they have, to the point that credit card debt has surged, especially in nominal terms, and delinquency is rising in a number of categories, including auto loans and credit cards.
The employer
All I hear from employers is that their workers are constantly letting them down. But if that’s true, why have employers been so eager to add to the population of people likely to let them down? Isn’t being let down by the Ravens enough? Apparently not.
Employers have continued to hire, and as I’m writing this, we are experiencing another September hiring spree as human resources folks come back from summer travels and start looking to fill available slots. Moreover, workers don’t always let their employers down. Productivity growth surged 2.7% last year, easily outpacing the 1.5% annual average since 2004.
The supply chain
I was thinking that investments in ports, truck drivers, fulfillment centers, etc. would be a shorter-term phenomenon than it has been. Instead of a brief, concentrated recovery from the pandemic, those who manage logistics keep investing in people and facilities. Even though investment in warehouses has slowed meaningfully, it still accounts for more than 50% of construction spending in the commercial category.
The federal government
Wait, isn’t the Covid crisis over? You wouldn’t know it by the way the federal government continues to inject dollars into the economy. Again, I think I confused normative considerations (the government should stop taking on debt so rapidly) with practical ones (the government is also comprised of Americans).
The federal government remains on a spending tear, whether on subsidies to manufacturers, infrastructure, or national defense. State and local governments have also been spending at elevated levels, in part because of federal stimulus they received from the March 2021 American Rescue Plan Act.
The housing market
Holy cow, did I miss this one. I thought the massive rise in mortgage rates would collapse home values and destroy wealth and consumer confidence. Instead, home sales prices have never been higher in America despite many prospective buyers dropping out of the purchasing marketplace for now.
Why? Because there have been so few existing homes for sale, new home builders have remained busy satisfying unmet demand. Privately-owned housing starts were up nearly 10% in August on a monthly basis as homebuilders seek to have new homes available by the time falling mortgage rates bring many would-be buyers back into the market.
There’s more. With many Americans refinancing to the ultra-low mortgage rates that characterized the pandemic era, spending power surged, and that’s not accounting for the roughly 40% of homes that are owned free and clear.
Beyond that, the move away from homeownership toward rentals, including among Millennials, our most populous generation, spawned an apartment building boom that only recently has begun to sputter.
The stock market
Who could have guessed that U.S. equity markets would continue to race higher even as corporate borrowing costs surged and we sustained a mini-banking crisis in March 2023? Not me. Thankfully, I’m a buy and hold sort of guy. If I had traded based on my projections, I’d owe the boys from Little Italy a bunch by now. My kneecaps remain in fine shape.
Believe it or not, I think the answer lies in America’s abundance of excellent CEOs. Oh, I know Boeing and some other companies have had their issues, and when they have those issues, the market has brutalized their share prices. But other CEOs (and their teams) have simply continued to rally corporate earnings. The poster child for this is obviously NVIDIA. Buoyed by the artificial intelligence craze, their second quarter earnings were up 122% from a year ago, while earnings per share were up 168%.
Potential correctness has many names, let me count the ways
Despite the lack of recession, I continue to swagger through our nation’s airports and hotel lobbies on my way to various appearances. How is this possible? Have I no shame? Not much, I’ll admit. But there’s more to it than issues of personal narcissism. I remain confident that an economic downturn is still one the way.
Consumer spending is about to slow
There is no way with all this accumulated debt and rising delinquency that consumers (two-thirds of aggregate demand) can continue to spend this way.
Elections
Government transition is about to transpire, and that will likely slow the delivery of federal monies into the economy. Moreover, more state and local governments are reporting fiscal difficulties, including my state of Maryland, where our incredibly handsome governor just cut nearly $150 million out of Maryland’s budget because revenues are falling short of expectations.
Geopolitics
The world is getting more dangerous, and that is translating into a reemergence of supply chain issues. Perhaps the best example of the dislocation is in the Red Sea, which continues to see attacks on merchant vessels on a routine basis. Supply chain issues are inflationary, which means that the Federal Reserve may not be able to reduce interest rates as rapidly as many are forecasting.
Economic theory
This one matters. Milton Friedman and Anna Schwartz taught us that monetary policy operates with long and variable lags. My very strong sense is that the lag effects of the elevated interest rates we’ve been living with are yet to fully pervade the economy. That will happen, and the economy will slow.
My dysfunction will be cured
I believe that there remains a window for recession to occur. It is admittedly a shrinking window, and any downturn is likely to be mild. Nonetheless, don’t be surprised if the economy slows early next year even as interest rates continue to slide.
For those of you in real estate and construction, you might be thrilled by a mild recession. Evidence of pronounced economic weakness will induce interest rates to fall even faster, setting the stage for rapid recovery in construction starts in 2026 and beyond. I have already declared 2026 The Year of the Realtor.
What’s next?
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