Thursday, February 9, 2023

Where is the recession? By Dr. Robin Dhakal

This week we learned that the US economy created 517,000 new jobs in January 2023 while the market estimate was just 187,000 jobs. That pushes the official unemployment rate down to 3.4% which is the lowest it has been since 1969. In addition, the average hourly wages also increased by 0.3% in January with an annual rate of 4.4%. All of these data along with the fact that the GDP grew by 2.9% in the last quarter of 2022 begs an important question: where is the recession?

In October 2022, the CEO of JP Morgan Chase, Jamie Dimon said that he expects the US to head into a recession “within the next six to nine months.” He was not alone in this prediction. Many financial analysts, economists, and news networks also concurred with Mr. Dimon’s view about the looming recession. One of the primary reasons that economists believe we are heading into a recession is because of the Fed’s efforts to bring down inflation. The inflation in the US has come down since July of last year. In June 2022, the CPI rose by 1.3%- one of the highest rates of increase in the recent past. However, that rate was 0% in July and -0.1% in December. This is an encouraging sign and a sign that the Fed’s interest rate hike is working. In fact, the Feds first started raising the interest rates in March and have gradually increased them since. It is also an encouraging sign that the Feds slowed the rate hike this month.

So, are the economists wrong about the possibility of a recession? It’s complicated. Historically, every time we have a higher level of inflation, the Fed uses its monetary policy tools to raise interest rates. When the rates are increased, consumer spending, investment, and exports fall. This causes domestic production to fall- hence causing the recession. One example of this is the inflation that persisted from the late 1960s to the early 1980s which is often coined “the great inflation.” To combat high levels of inflation, the Feds increased the rates aggressively up to 20% which pushed the US economy into a recession. Following the recession, the Fed started lowering the rates. This, coupled with fiscal policies of cutting tax rates, led to one of the strongest recoveries in the recent past.

Even though there are some similarities with the 1980s, there are a lot of differences, too. Unlike the 1980s when we saw a high level of inflation and two recessions in quick succession, we have a very robust GDP growth rate even while the Feds increased the rates aggressively. There are some reasons for concern because of the layoffs in the recent past from companies like Twitter, Facebook, and Google, but the data suggests that the labor market is still strong. Much of the layoffs we are seeing are companies shedding some of the overhiring we saw during the COVID pandemic in the tech industry. Moreover, as the world is getting past the COVID-19 pandemic and its economic impacts, the supply chain issues that companies experienced are fading. Shipping volumes are up in most of the largest ports in the world. Even though the supply chain issues are not expected to fully return to a normal level until 2024, it has improved. In addition, crude oil prices have come down significantly and the stock market is higher than at the start of 2020 with the Dow increasing by about 18% since the start of 2020. All of this is good news, and we should expect inflation rates all around the world to fall because of these factors.

Considering all these factors, it is reasonable to think that we *might* dodge the bullet on the recession this year or have a shorter, milder recession. That, of course, will depend on two major things: 1) how does the Fed reach moving forward? Will they keep raising the rates until the inflation has cooled significantly, or will they increase it at a slower rate? 2) how will Congress handle the debt limit crisis? On January 19, the US reached the debt ceiling. However, Treasury Secretary Janet Yellen doesn’t expect the US to default on its debt until early June. If the debt ceiling fight in Congress is not resolved soon, it will have a devastating effect on the US and global economy- and will almost certainly put us in a recession. It will raise the interest rates on the loans that the government owes, rattle the bond market, and affect the stock market globally- to name a few.
Dr. Robin Dhakal

Dr. Robin Dhakal Bio:

“Dr. Robin Dhakal is an Assistant Professor in the Forbes School of Business and Technology. He earned a M.A. and a Ph.D. in Economics from University of South Florida and a B.A. in Business/Economics and Mathematics/Computer Science from Warren Wilson College. His academic research focuses on development economics and political economy. He has been teaching Economics in colleges and universities for the past nine years." Dr. Robin's LinkedIn Address

1 comment:

  1. Thanks Dr. Dhakal! Some great info here! Just listened to Dion Rabouin who discussed the Fed path as well after the Retail Sales report came out today.