This economy can’t go on forever. GDP may still be growing, but it’s at an anemic rate. And other indicators are piling up that suggest a recession is imminent: The yield curve is inverting, hiring and house price growth is slowing and Philadelphia may win the World Series.
If you follow financial commentary, it sounds like we’re about to hit the inflection point — that moment when the economy turns and we enter a recession; the stock market crashes, inflation deflates, people lose jobs and housing prices tank. But if there has been one thing consistently true over the past two years, it is that what everyone consistently predicted has turned out to be wrong. That’s because we’re in uncharted territory. We have never before turned the economy off, then turned it back on again as we did in the pandemic.
Take high inflation, a phenomenon that the American economy hasn’t experienced in almost 40 years. A chart by chief economist Torsten Slok at Apollo Global Management Inc. demonstrated that everyone has been consistently wrong about inflation and is still getting it wrong. It seems that every month the consensus forecast predicts that this is the month the inflection point arrives and next month inflation will start its quick drop to normal levels. But each month inflation goes higher or stays the same.
To be fair, the Ukraine war was unexpected and made inflation worse. But the baseless optimism continues month after month, even though inflation can take years to get under control. Why is everyone so wrong and not learning from their mistakes? It may just be that it’s been so long since we’ve experienced inflation that people just don’t know what to expect and assume the familiar “normal” will return soon. The Federal Reserve may also be hoping that if they say inflation will fall next month, the market will believe it and then it will actually happen.
Or it may just be that our old models and data don’t fit the current environment and they keep telling us the wrong thing. Inflation today is being caused by many factors, many of which we’ve never dealt with before: pent up demand from the pandemic, supply chain disruptions, exceptionally accommodative monetary policy and a lot of government stimulus. This is not your grandmother’s inflation. That doesn’t mean monetary policy won’t work to rein it in, but it may take more time and higher rates than any model is predicting.
In the past, it has often required a recession to bring inflation down quickly. And it would seem like that’s what will happen any day now, too. But no one told American households that are still spending money. This may be because they’re also in an unusual position. Despite high inflation, they still have money in the bank. Data from Chase shows checking account balances are higher than pre-pandemic levels for all income levels, the result of not buying anything for a year and a lot of government checks. With inflation outpacing wage growth, that can’t last forever. Bank balances may be higher than normal, but they are falling. For now, though, the spending is propping up the economy, earnings are still relatively good and, while hiring is slowing, job openings are still well above their pandemic levels.
The housing market won’t necessarily crash, either. Price growth is falling, but it’s still a long way from a noticeable decline in prices. And maybe declines won’t materialize. Many people have fixed-rate mortgages below 3.5%. That means even as higher rates chill demand, supply may remain constrained because many people can’t afford to move, so prices may fall in some areas but it won’t be the bloodbath people expect.
These are strange times, which means the last 30 years of data — maybe even the last 50 years — don't offer much insight. The normal indicators may not tell us much of anything at all. Even the reliable inverted yield curve that’s supposed to predict recession may be less reliable after years of quantitative easing followed by quantitative tightening.
Perhaps there will be no inflection point when a recession hits. Maybe inflation falls and then we just recover. That’s not unprecedented, but we are entering this period from a different place than we’ve ever been before.
Maybe everything will keep slowing down, but without any sudden reversals. We’ll have low growth for the next three to five years, inflation will go down, then back up, and then settle into a level lower than now but higher than we’ve been used to.
Perhaps demand won’t suddenly drop because the Fed is too timid to increase rates high enough and keep them there. Instead, spending will slowly diminish as inflation siphons out spending power and erodes saving. People will keep buying some things and firms may hire fewer people, but not fire them either. Meanwhile, fiscal policy won’t be able to do much good because higher interest rates will prevent the government from either spending more or cutting taxes.
In this world, the economy is just sort of blah for a long while and we slog along full of uncertainty. The sudden turn and recession we are expecting just never happens. That will mean less pain in the short run, because people won’t lose jobs or their house. But over the long run it can be worse because it means slower real wage increases, less investment, and ultimately, less growth.
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ABOUT THE WRITER
Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
