Economists Expect Recession Created By Economists

The Fed is expected to stall the economy to fight inflation.

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WSJ (“Economists Now Expect a Recession, Job Losses by Next Year“):

The U.S. will enter a recession in the coming 12 months as the Federal Reserve battles to bring down persistently high inflation, the economy contracts and employers cut jobs in response, according to The Wall Street Journal’s latest survey of economists.

This is a confusing lede. Are there three causes of the expected recession or is the Fed intentionally crushing the economy in order to kill inflation?

On average, economists put the probability of a recession in the next 12 months at 63%, up from 49% in July’s survey. It is the first time the survey pegged the probability above 50% since July 2020, in the wake of the last short but sharp recession.

Their forecasts for 2023 are increasingly gloomy. Economists now expect gross domestic product to contract in the first two quarters of the year, a downgrade from the last quarterly survey, whereby they penciled in mild growth.

On average, the economists now predict GDP will contract at a 0.2% annual rate in the first quarter of 2023 and shrink 0.1% in the second quarter. In July’s survey, they expected a 0.8% growth rate in the first quarter and 1% growth in the second.

Bad news for an economy that’s already in bad shape by any reasonable metric, having not yet truly recovered from the COVID pandemic and the various supply chain issues that ensued directly or indirectly from it.

Employers are expected to respond to lower growth and weaker profits by cutting jobs in the second and third quarters. Economists believe that nonfarm payrolls will decline by 34,000 a month on average in the second quarter and 38,000 in the third quarter. According to the last survey, they expected employers to add about 65,000 jobs a month in those two quarters.

Forecasters have ratcheted up their expectations for a recession because they increasingly doubt the Fed can keep raising rates to cool inflation without inducing higher unemployment and an economic downturn. Some 58.9% of economists said they think the Fed will raise interest rates too much and cause unnecessary economic weakness, up from 45.6% in July.

Again, I find the writing here confusing. If growth slows and profits decline, it naturally follows that fewer jobs will be created and that some existing jobs will go away. That’s a very different thing, though, than a government entity intentionally putting pressure on the economy to cut jobs.

“‘Soft landing’ will likely remain a mythical outcome that never actually comes to pass,” said Daniil Manaenkov, an economist at the University of Michigan. A soft landing occurs when the Fed tightens monetary policy enough to reduce inflation, but without causing a recession.

“The coming drag from higher rates and stronger dollar is enormous and will knock off about 2.5 percentage points from next year’s GDP” growth, said Aneta Markowska, chief economist at Jefferies LLC. “In light of this, it’s hard to imagine how the U.S. can avoid a recession.”

This puts us back to where we were in the middle of the Reagan administration when the Fed intentionally tanked the economy in order to crush inflation. This was and remains controversial, in that different people benefit from one course of action over another. High inflation is devastating to lenders, those on a fixed income, and those with large savings but beneficial to debtors and of little concern to whose incomes keep pace. And, obviously, some people are more likely to bear the brunt of job losses than others.

Economists’ average forecasts suggest that they expect a recession to be relatively short-lived. Of the economists who see a greater than 50% chance of a recession in the next year, their average expectation for the length of a recession was eight months. The average postwar recession lasted 10.2 months.

For the year as a whole, they expect the economy to grow 0.4% in 2023, through the fourth quarter compared with the fourth quarter of the prior year. In 2024, they see the economy growing 1.8%.

Still, forecasters expect the labor market to weaken in the months and years ahead. They predict the unemployment rate, which was 3.5% in September, will rise to 3.7% in December and 4.3% in June 2023. Economists’ average forecast for the jobless rate at the end of next year is 4.7%, and they expect it to stay broadly at that level through 2024. While a 4.7% unemployment rate is low by historical comparison and indicative of the current worker shortage, it suggests that the Fed’s efforts to bring down inflation will inflict some pain on workers.

Well, yeah.

“The Federal Reserve is choosing between the lesser of two evils—take a recession with a rise in unemployment today or risk a more corrosive and entrenched inflation taking root,” said Diane Swonk of KPMG. “The risks of a misstep are large given the sins that low rates likely papered over,” she added.

Again, whether a recession is the “lesser of two evils” really depends on where one sits in the economy.

Interest-rate increases by the Fed are expected to further slow demand for housing next year. Economists expect home prices to decline 2.2% in 2023, measured by the U.S. Federal Housing Finance Agency’s seasonally adjusted purchase-only house price index. That would mark the first such decline since 2011.

Which is great news if you’re hoping to buy a house and really bad news if you’re expecting to cash out of your current house as the major asset in your retirement nest egg. And, obviously, anyone who still has a variable rate mortgage is seriously hosed.

The Fed has raised its benchmark federal-funds rate by 0.75 point at each of its last three meetings, most recently in September, bringing the rate to a range of 3% to 3.25%. Another uncomfortably high inflation reading for September is likely to keep the Federal Reserve on track to increase interest rates by 0.75 percentage point at its meeting next month.

Economists on average expect the Fed to lift the federal-funds rate to 4.267% in December, which implies at least one more increase of 0.5 point that month. They see the federal-funds rate peaking at 4.551% in June next year.

Which is extraordinarily high by the standards of the last 20 years; it exceeded that only briefly ahead of the Great Recession. Indeed, it’s been lower than that for most of my lifetime.

Most economists expect that the Fed will eventually have to reverse course and start cutting rates late next year or in early 2024. Some 30% of economists expect the central bank to lower rates in the fourth quarter of 2023, and 28.3% expect the next rate cut in the first quarter of 2024.

From a politics standpoint, then, the pain from this recession won’t hit until shortly after the November midterms and it will start to ease just ahead of the 2024 primaries.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Lounsbury says:

    A recession is a lesser of two evils depends on if you understand the econometric history.

    The history of the 1970s across the developed markets rather taught a lesson in terms of inflation, multi-year patterns under continued pricing pressure of energy and supply. The response of the early 1970s -rather generally in line with what US Left presently generally argue for in their inflation denialism (temporary…) of a modest response led to the late 1970s entrenched elevated inflation (among as always multiple factors, as nothing in this area is monocausal or discrete).

    It is far better to choke off inflationary pressure now than to repeat the stop-and-go “but what about the children/workers/other photogenic group for argument” monetary policy errors of that decade-and-half period.

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  2. Sleeping Dog says:

    People writing on subjects they don’t understand?

    Given that nearly every business I go past has a ‘help wanted’ sign up, a not insignificant portion of the predicted job losses may come from empty positions going unfilled. Last month’s job report showed continued, if slower gains in jobs with the country still having an unemployment rate of ~3.5%. A retreat from that figure would be a far different recession from one where the unemployment rate at the start was in the 4.5-5% range.

    A question, if inflation is raging at 8-10% throughout the world, is the Feds attempts to crush US inflation close to futile?

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  3. OzarkHillbilly says:

    @Sleeping Dog: A question, if inflation is raging at 8-10% throughout the world, is the Feds attempts to crush US inflation close to futile?

    That’s along the lines of what I was thinking.

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  4. JohnMc says:

    Just an observation that international effects are large and widespread and deserve at least a nod in any serious discussion of this issue.

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  5. gVOR08 says:

    Again, whether a recession is the “lesser of two evils” really depends on where one sits in the economy. – James Joyner, above

    It is far better to choke off inflationary pressure now than to repeat the stop-and-go “but what about the children/workers/other photogenic group for argument” monetary policy errors of that decade-and-half period. – @Lounsbury:

    liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. … enterprising people will pick up the wrecks from less competent people. – Andrew Mellon, Treasury Secretary to Herbert Hoover

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  6. Slugger says:

    I consider myself a veteran of the 1980 war on inflation. The US had significant inflation during the decade of the 1970s, and the government took laughable steps during that time with the WIN buttons as examples of comical futility. Paul Volcker became the head of the Fed in August of 1979 and cranked up the federal fund rate to more than 11%. This led to an economic downturn from 1980 to 1982. Subsequently, inflation subsided for almos 40 years.
    In 1980, I had a new baby, a new house with a 9.5% mortgage, and was trying to start a small business. My economic growth was pretty slow. My cohort of friends were likewise underemployed. We coped by various means; my wife gave up her car and used a bike with a kiddie seat to get around. We shopped using the coupons that grocery stores put in the daily paper. I became a runner to relax and get distracted on the cheap. We tent camped in state parks for vacations. I look back on those days with some fondness, and I’m proud to say that my daughter recollects her early days as very good; I was able to hide my anxiety from her, not from the wife, of course. It all ended well, very well.
    I do wonder if the narrative of Volcker choking the inflation monster with high interest rates is 100% true. Maybe there were other factors; maybe there are ways to control things with less pain. I think that the economy is less well understood than commonly thought. Left economists and right economists are all full of certainty and prone to grand announcements about their preferred course of action. Maybe the ship of state is being piloted by children who don’t actually know what they are doing.

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  7. gVOR08 says:

    I’ve been reading Ben Bernanke’s book 21st Century Monetary Policy. Bernanke’s one of the good guys, the recovery from the second Bush II recession would have been even worse without him. And the book is a fairly good lay explanation of monetary policy. But it does tend to be a long, rather boring, narrative of successive Fed Chairs as dedicated public servants with a deep understanding of economics and the system, except when they were wrong, because reasons.

    An interesting thread throughout the book is that policy depends on the value of u*, the “natural” rate of unemployment, r*, the “natural” interest rate, and the slope of the Phillips Curve, interspersed with admissions they have only the vaguest estimates of these numbers.

    The Phillips Curve represents inflation as a function of unemployment. In the early 80s Fed Chair Volcker thought the curve was steep, meaning he could cut inflation with a small increase in unemployment. Turned out he was wrong. Of late the Curve has been thought to be fairly flat, which current Chair Powell thought meant he could allow low unemployment with little risk of inflation.

    The flip side is that if the curve is flat, it will take a lot of unemployment to bring down inflation. Unless it’s already coming down on it’s own, in which case a lot of people will lose jobs for no reason. Oopsies.

    The only thing we know for sure is that the Fed will decide to raise rates X%, expecting that to increase unemployment by Y%, and then they will blame the loss of jobs on the Y %for being lazy slackers.

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  8. Just nutha ignint cracker says:

    @gVOR08:

    The only thing we know for sure is that the Fed will decide to raise rates X%, expecting that to increase unemployment by Y%, and then they will blame the loss of jobs on the Y %for being lazy slackers. [emphasis added]

    Indeed. Then again, we know God is blessing us because we are rich and that God is punishing you because you are poor. (Unless it’s not that way of course, in which case we know that even though we are poor, God loves us, and that you’re rich because evil sometimes triumphs for a season, but you’ll get yours eventually.)

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  9. Michael Cain says:

    When I was young, the Fed making money cheap or dear passed through very limited channels and affected businesses that employed large numbers. Over the course of 30 or so years, the channels were greatly expanded and cheap money no longer flowed to employment. This put us in the position where cheap money caused inflation — but largely only in asset prices. I am wondering if we might now see a recession that behaves the same way — an asset-price recession, but employment remains solid.

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  10. Lounsbury says:

    @Sleeping Dog: No, not close to futile. Dollar strength combined with US market as signficant demand driver combined with USA market being (despite your American misapprehensions based on a band of consumer facing consumption goods) comparatively less trade exposed – and present pricing pressures are feeding as much through non-tradeables (localised services) as tradeables.

    Dollar significant appreciation against all currencies – which is in no small part due to US Fed – is also mitigating your inflation on the tradeables front.

    Your inflation rate would easily be a couple points higher without the strengthening dollar effect.

    However, sustained support and acceleration on energy source substitution is badly needed for medium term risk – that means Mr Manchin’s permit smoothing (in some fashion) is really actually fundamental to your overall green success, regardless of annoying side gifts he needs as his facilitation payments.

    @gVOR08: Leftie deformations of Central Bank action are fairly useless. Of course Central Bankers don’t “blame” anyone – your projection on them of your view of the opposition political party is tedious party political nonsense. Inflation analysis – as much as the Left focuses due to its own prejudices – on the labour component is much broader than labour market demand, particularly in this kind of situation where clear drivers are in sustained non-transitory pricing on inputs like energy and food. Labour market is an aspect of demand analysis, not the sole point.

    @Michael Cain: There is potential there as there are signs that the experience of difficultly in replacing labour after shedding it for the Pandemic has broadly induced firms to try for time being labour hoarding. If labour hoarding continues while demand pressures are easied (including pricing demand on labour – that is wage increases) – that a shortish recession where the asset market side absorbs is a potential path.

    Smoothing (as in reduction in time/burden to Green Light on projects) and acclerating non-hydrocarbon replacement of hydrocarbons is really necessary to avoid a prolonged energy shock or repeat wave energy shock (à la early to mid 1970s). Energy pricing feeding into inputs on food are non-visibile to consumers with too much end-consumer focus (people going on about pump prices e.g.) but not at all trivial.

  11. Andy says:

    I would just point out the economic profession generally sucks at making macro predictions.

    While a recession does seem likely given historical precedents, and prudence demands planning for one, I don’t have much confidence in predictions about the scope, timing, and extent of any recession.

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  12. Lounsbury says:

    @gVOR08: If that is supposed to be a comment on my comment, it’s profoundly stupid as Hoover’s Treasury Secretary was facing Depression, a profound (the worst yet documentation) deflationary cycle – which are much harder to deal with the inflationary cycles. In other words, the exact opposite problem (and of course that government did a completely bad job of responding), which was panic and demand collapse, and for which the appropriate response was priming the pump, not more demand destruction in a deflationary spiral.

    That is utterly different than the current issues, which are structurally essentially a replay of the 1969-1973ish period – of course with difference as nothing is a perfect repeat, but structurally similar across key factors enough to provide analogical basis for framing.

    @Slugger: The 1980s episode was the end game of what started in the 1970s (or which purpose one needs to includ 69 or even 68 in the economic history).

    The US Fed professionals, who I have had in my prior career the honour of interacting and working with during the 08 crisis are professionals – pragmatic non-ideologicals every one that I knew (and several I knew are now at Governor levels). They are the very picture of what you lot normally want in government. Dispassionate government technocratic professionals.

  13. Lounsbury says:

    @Andy: Humans generally suck at prediction, above all for complex dynamic systems with limited and very imperfect data: economics, politics. Sadly Humans are rather bad at admitting this.

    At the same time, as with the political subject here, while the prediction of the specific detail on outcomes is something like predicting dart throws, the prediction of broad movement and effects (as like the prediction with reasonable polling data on whether a race is close or not although not so much the point-result), that has a degree of reliability – of course within the bounds that something new and significant doesn’t intervene (like Russians blowing up Norway pipes).

    Econometric data is very noisy, very messy and besides being late, comes with significant error bars (as the collection is no easy nor entirely relaible tasks – once you see the guts of it…. well one has to do what one can, better imperfect information that is consistent from year to year in its imperfection than no information).

  14. gVOR08 says:

    @Lounsbury: @Lounsbury: Dang. Lost a bet with myself. I was expecting an off-point, condescending response by noon.

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  15. Mimai says:

    @Andy:

    I would just point out the economic profession generally sucks at making macro predictions.

    Hear hear!

    IMO, prediction markets are better sources. eg, Metaculus has it at 55% that US will enter a recession before end of 2023.

    2
  16. Kurtz says:

    @Lounsbury:

    tedious . . . nonsense

    You’ve got a lot of damn gall accusing anyone else of tedium, nonsense, or projection.

    Your views are so transparently self-serving that it’s tempting to get banned to put you in your place. Then again, you lack the faculty to know when you have been served.

    On the other hand, you seem to use fewer archaic, empty words after being told to throw your battered thesaurus away, so maybe there is some hope.

    But I doubt it.

    4
  17. Kurtz says:

    @Lounsbury:

    If that is supposed to be a comment on my comment, it’s profoundly stupid as Hoover’s Treasury Secretary was facing Depression, a profound (the worst yet documentation) deflationary cycle – which are much harder to deal with the inflationary cycles.

    Did the whoosh knock you over?

    2
  18. Gustopher says:

    “Economists expect home prices to decline 2.2% in 2023, measured by the U.S. Federal Housing Finance Agency’s seasonally adjusted purchase-only house price index. That would mark the first such decline since 2011.”

    Which is great news if you’re hoping to buy a house and really bad news if you’re expecting to cash out of your current house as the major asset in your retirement nest egg. And, obviously, anyone who still has a variable rate mortgage is seriously hosed.

    If we raise interest rates, and housing prices drop, this isn’t even that great for people who want to buy — the higher interest rates mean the house is still roughly just as expensive, they are just paying more to the banks, and less to the current homeowner.

    The higher interest rates also make it more expensive to build housing, while cutting the profit. So, less new housing starts.

    Rent and housing prices have been rising ahead of inflation for the past decade — there’s basically a housing crisis everywhere that people want to live, and a “lack of reasons to live here” crisis in a lot of the rest of the country. We need more housing, not a big drag on new housing starts. (And we need reasons to live in rural and small cities)

    This is going to screw things up for give or take everyone — buyer, seller, renter, builder, and person who just owns a house. Pretty sure the dude living out of his car and washing up in a public bathroom on his way to work won’t be doing better either. The insane man living on a grate, talking to the demons in his head might not notice.

    5
  19. wr says:

    @Lounsbury: “but what about the children/workers/other photogenic group for argument””

    Yes, Lounsbury, the only reason people pretend to care about children or even workers is because the pictures of them suffering are so impressive. Deep down, everyone is just like you, incapable of caring about any other human being.

    You keep telling yourself that.

    6
  20. wr says:

    @gVOR08: “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. … enterprising people will pick up the wrecks from less competent people. – Andrew Mellon, Treasury Secretary to Herbert Hoover”

    “Exterminate them all!” — Kurtz, Heart of Darkness (and Apocalypse Now)

    1
  21. Michael Reynolds says:

    @Gustopher:
    It’s only a good time to buy a house if you happen to have it all in cash. In LA that means having a good 2 million handy. Which I don’t. So I just watch the Zillow number on my house creep slowly downward, while mortgage rates creep upward.

  22. Kurtz says:

    @wr:

    “Exterminate them all!” — Kurtz, Heart of Darkness (and Apocalypse Now)

    You’re taking me out of context.

    3
  23. Lounsbury says:

    @wr: Indeed people care about children, which is why bad policies, bad ideas, bad actions are so frequently dressed up with children as excuses as the weak-minded and foolish are easily deceived, fooled or misdirected by such regardless of real impact or benefit in the aggregate.

    That being the point, your strawman response rather proving the point.

    @Kurtz: Well while it is mechanical to cause offence to the party political knee jerkers, my comments serve absolutely no personal interest at all – other than a generalised desire not to see USA not fuck itself up too much.

    That you perceive “transparent self-serving” is mildly amusing confirmation of the ideological lensing.

  24. Kurtz says:

    @Lounsbury:

    Well while it is mechanical to cause offence to the party political knee jerkers, my comments serve absolutely no personal interest at all – other than a generalised desire not to see USA not fuck itself up too much.

    That you perceive “transparent self-serving” is mildly amusing confirmation of the ideological lensing.

    Lol. First of all, while there are some knee-jerk reactions around here, I’m not typically one of the ones that makes them.

    Secondly, the criticism of you could make of me, is that I have been an asshole to posters here a few times. I’ve publically offered my apologies in those situations. But you know what? I used those occasions to grow personally. I’ve also used my time here to learn from our hosts and the commentariat (including from your posts) and either sharpen or discard views that don’t stand up to scrutiny.

    Can you say any of those things wrt your persona here? Well, let’s take a look.

    You have no idea what you’re talking about as it pertains to the Left in general. That failure of understanding has been pointed out to you, in specific terms, yet you just go on spewing the same bullshit. Is it a problem with basic reading comprehension? Or do you read into anything whatever way suits you? (Neither possibility speaks well of you, hmmm?)

    Somebody above was talking about the economic weight of the US. Oh wait, it was you. Looks like you don’t even understand your own views all that well. Do you really think the the US fucking itself up wouldn’t affect you? (Careful how you answer…)

    If you take anything from this reply, it should be this:

    I’ve defended you and called you a valuable voice here. But too often, finding the occasional gem requires shoveling through piles of shit barbed with your needles. And yet it seems like you expect people here to thank you for the necrotizing infection you caused all because they found a tiny diamond once or twice.

    Amusing, ain’t I?

    2
  25. Just nutha ignint cracker says:

    @Kurtz: I’m not sure that it was one of those “swoosh” events considering that [freely paraphrased] *liquidate everything so that my type can benefit from the chaos* is one of those “morally impure success”es that he keeps advocating for.

  26. OzarkHillbilly says:

    @Kurtz: Sorry, but you are wasting your time.

    ps: yes, the “whoosh” knocked him over.

  27. Kurtz says:

    @OzarkHillbilly:

    Sorry, but you are wasting your time.

    ps: yes, the “whoosh” knocked him over.

    Hey now, don’t tell me to have a good time.

    😉

    But yes. I know.

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  28. Jen says:

    (And we need reasons to live in rural and small cities)

    If only we had some indication that working from home was effective and that employers could benefit from these situations as much as workers…

    Seriously, I don’t understand why there aren’t more rural communities advocating for this. When we were recently in Ireland, there were billboards encouraging WFH situations, and the smaller, rural communities had installed high-speed broadband to make it happen.

  29. wr says:

    @Lounsbury: “Indeed people care about children, which is why bad policies, bad ideas, bad actions are so frequently dressed up with children as excuses as the weak-minded and foolish are easily deceived, fooled or misdirected by such regardless of real impact or benefit in the aggregate.”

    Are there no prisons? Are there no workhouses?

    1