Whether President Biden insists a recession is avoidable or his critics argue the wolf is coming, both sides are acting as if the nation is facing an unprecedented catastrophe.
Partly it is political theatre. Biden fighting on behalf of an already beleaguered presidency, and many of the naysayers hoping a downturn could be the coup de grace for Democrats.
Behind the rhetoric lies the reality that recessions are a normal part of American economic life. The US has had one every 6½ years on average since 1945.
And in this case, most professional economists believe that any downturn now is likely to be relatively mild, with a fairly quick recovery.
“We’re calling for a small recession,” said Jack Ablin, chief investment officer at Cresset Capital. “That means it won’t be protracted and things won’t fall apart” as they did during the Great Recession and again in 2020 when the pandemic hit.
Many households are cash rich, jobs are plentiful and the demand for new workers is strong. Banks are well capitalized, giving them a solid cushion against a downturn in business.
What might be different this time is public sentiment, coupled with a handful of unusual factors – foremost among them the grueling war in Ukraine.
For most Americans, the pandemic and accompanying economic upheaval came after an exceptionally long period of relative economic stability.
The economy was barely growing and real incomes were stagnant, but unemployment was low in most sections of the population, prices were stable, interest rates were at rock-bottom and deals in cheap overseas goods were glutted.
Most people had adjusted to the status quo.
So the COVID-19 downturn hit like a thunderbolt, and the eruption of inflation – driven largely by consumers who suddenly began spending their pandemic-induced savings – was another shock to popular expectations.
Now the economic indicators seem primed for a recession. The broad-based Standard & Poor’s 500 stock index has fallen more than 20% since its peak on Jan. 3. US consumer confidence has fallen to a record low, largely thanks to high inflation. Retail spending, housing construction and manufacturing output all fell last month.
And the consumers who power the US economy are beginning to limit their discretionary purchases, such as appliances and services.
Tom Straus, owner of Straus Carpets in Oakland, has seen a sudden drop in orders for new flooring in homes in the San Francisco Bay Area. Typically, his summer commercial business involves projects for schools worth about $1 million. such orders so far this year are only $30,000.
“Our future work is decreasing,” he said.
Many other small and large business executives and workers are preparing for tougher times, fears being fueled by plans by the Federal Reserve to raise interest rates more sharply to combat high inflation.
“We’re teetering on the brink of a recession, especially as the Fed pulls out these big guns,” said Christopher Rupkey, chief economist at financial research firm Fwdbonds.
Larry Summers, Harvard economist and former Treasury Secretary, notes that whenever inflation tops 4% (it was more than double what it was in May) and unemployment falls below 4% (it was 3 last month, 6%), which is indicative of an overheated economy has historically always led to a recession within a year or two.
Whether inflation is avoidable, the real question may be: how bad and long will the next downturn be?
And in that regard, there’s a greater consensus among experts that it probably won’t be like the latest episodes.
A common definition of a recession is two consecutive quarters of negative economic output, i.e. a shrinking gross domestic product. But an official designation is made by a nonprofit research organization that looks at a broad data set and declares a recession, usually months after it begins.
The Great Recession that began in late 2007 lasted 18 months – the longest in 90 years – and was also one of the deepest. Millions of Americans lost their jobs and homes after the housing bubble burst and major banking firms collapsed. The unemployment rate shot up to 10%.
The 2020 pandemic-driven recession was the shortest on record, just two months from peak to trough, according to the National Bureau of Economic Research. But the sudden collapse in the economy was unprecedented, as businesses across the country shuttered and consumers sought shelter for weeks. About 22 million jobs disappeared between February and April of that year.
The recovery has been quick and strong since then, largely due to unprecedented government support for households and businesses. Multiple rounds of stimulus checks helped spur consumer spending and demand, which contributed to higher inflation. Much of this money has yet to be spent, which will provide a cushion for many households.
According to Moody’s Analytics calculations, based on Fed and other government data, Americans had a total of $2.7 trillion in excess savings in the first quarter. Though more than half of that was held by households in the top 10% of incomes, those in the bottom 20% had, on average, about $5,700 more cash on hand than they would otherwise have without federal aid and the impact of the pandemic.
That extra savings, coupled with historically low household debt and the strain on loan servicing — many homeowners were locked into low mortgage rates before recent hikes — suggest most people are better off financially and could contribute to the next to mitigate the recession.
Bank of America Institute economist David Tinsley saw a noticeable increase in the number of BofA customers using their credit cards last month, as has been the case at many banks. High gas prices, he says, hit low-income families hard and also reduce spending on goods.
But looking at BofA customers’ savings and checking account balances, Tinsley said, “Households continue to have high buffers compared to pre-pandemic levels.”
For John Barone, 58, the difference between where we were on the eve of the Great Recession and today is like night and day.
In 2007, he ran his own home renovation business in Baltimore and made payments on a $1 million loan. When the housing market collapsed, he laid off 20 workers and eventually lost his business, home, and wife.
Today, Barone and a business partner operate out of Washington, DC and offer tours with their seven golf carts. His business debt is modest — $32,000 in bank loans for two electric vehicles. Barone has seven seasonal workers and lives modestly in an apartment on Capitol Hill. “I don’t have a car, I don’t have to buy gas,” he said. “I’ll go to the bread shelf and buy my bread at half price.”
Barone is more confident than most. Nationally, small business owners were asked last month by the National Federation of Independent Business how they see conditions over the next six months. The result was the lowest reading in 48 years.
At larger companies, a May Conference Board survey of 750 top executives found that more than 60% of them see a recession coming or coming. However, both surveys suggest that employers are unsure what this could mean for employment and the potential for layoffs.
Many employers are still struggling to fill vacancies and may be reluctant to fire workers immediately. The unemployment rate was 3.6% in May, a level above the pre-pandemic low half a century ago, and there are still nearly two job openings for every person officially unemployed.
New jobless claims, an indicator of layoffs, have edged up in recent weeks but remain low by historical standards. May job growth was the slowest in 12 months but still a robust 390k.
“Of course we’re slowing down, but think about how fast we’ve grown,” said Carl Tannenbaum, chief economist at Northern Trust in Chicago.
One thing that worries Tannenbaum is the risk of domino effects from the Fed’s move to raise interest rates. The pivot has already taken a toll on the US housing market, but tightening by the Fed and other central banks could also hit developing countries and the global economy as investors reallocate funds. That could circle back in and drag the US down with it
Economists say the Fed has misjudged the risk of inflation and has been slow to abandon its easy money policy, but is now trying to catch up, raising interest rates aggressively to dampen demand and slow growth, including in the labor market .
“I think they see it as the worst of two worlds — either stagflation or recession,” said Beth Ann Bovino, US chief economist at Standard & Poor’s Rating Services. Stagflation – a state of high inflation and stagnant activity – plagued the economy in the 1970s and only ended after the Fed raised interest rates sharply and pushed the economy into a deep double-dip recession in the early 1980s.
“In my opinion, to avoid stagflation, they would risk the economy and go into recession instead of stagflation for so many years,” Bovino said.
Jeffrey Korzenik, chief investment strategist at Fifth Third Bank in Tampa, Fla., said the country is unlikely to avoid a recession, largely because of the strength of the job market.
He expects the Fed’s tightening to lead to more layoffs, but said: “We have so many open positions that it will be easier to get workers back into the workforce. It’s not bulletproof, but it means the economy is less likely to fall off a cliff.”