Misplaced recession debate
Housing leads recessions and recoveries. What’s on the way?
Much of the “recession” debate is poorly spaced. I think a recession started in May and a third quarter of negative GDP is coming.
Some believe that a third quarter of declining growth will mean a recession started in the first quarter.
I link the recession to a decline in retail sales and a big housing slump that began in May.
No matter. What matters is the shape of the economy in the future. And a fourth quarter of negative growth wouldn’t surprise me in the least.
History of bubbles blown by food
The Federal Reserve has burst three massive bubbles in a row: the DotCom bubble, the housing bubble, and what is now known as the everything bubble.
In each case, the Fed popped bigger and bigger asset bubbles. The wealth effect stimulated spending and borrowing.
Low interest rates again fueled a huge housing bubble.
In the aftermath of the DotCom crash, the Federal Reserve burst the housing bubble. In the wake of the housing crash and the Great Recession, the Federal Reserve started the entire bubble.
The Everything Bubble culminated in unprecedented pandemic stimulus, QE, and absurdly low interest rates.
Impact of deglobalization
Deglobalization is underway. A key ramification is higher inflation.
The Fed no longer has the wind of globalization at its back pushing prices down. It has inflationary aspects of globalization blowing stiffly in its face.
That’s another reason not to expect the Fed to come to the rescue soon with QE and lower rates.
For discussion, please consider Deglobalization: New supply chains are inefficient and will increase inflation
Expect a long period of weak growth
It is recovery time of three consecutive bubbles. Expect a long period of weak growth, no matter what it’s called.
This time there will be no rescues. Nor will the Fed backtrack quickly on interest rate policy for fear of spurring more inflation and unwanted demand.
Unless house prices crash, the housing sector looks to be weak for a long time, and the Federal Reserve is unable or unwilling to offer much help.
Housing tends to start and end recessions. But where does housing go if prices stay high coupled with mortgage rates of more than 5 percent?
A drop in assets across the board is likely. If so, the impact of the wealth effect on spending rates will be huge.
What about jobs?
- The Covid recession was very short, two months, not even a full quarter of declining growth. The pandemic was also accompanied by the largest job losses in history.
- I expect the opposite of the Covid recession: a long period of weak growth accompanied by relatively high unemployment figures.
Countless times in the last six months I’ve heard that jobs are too strong for a recession.
Such talk is nonsense.
We can easily see three or four quarters of negative GDP with relatively strong jobs because we never fully cover losses from the pandemic.
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Employment levels in retirement age groups
Age 60+ Employment
- In 2022: 22.09 Million
- In 2008: 13.46 million
- In 1999: 8.22 million
- In 1981: 7.21 million
There are more than 22 million people aged 60 and over who are still working. We’ve never seen anything like this before, so don’t expect previous recessions to be a model for this one.
Millions of these people will retire. Employment may drop substantially when these boomers and Gen Xers retire, but falling employment and rising unemployment are not the same thing.
I’m calling BS on the second consecutive amazing jobs report, I understand why
On August 5, I commented I’m calling BS on the second consecutive amazing jobs report, I understand why
Although I expect jobs (more specifically unemployment) to be strong in this recession, the numbers don’t add up.
Synopsis from March
- Employment -168,000
- Jobs +1,680,000
That’s too much and I smell revisions or wild data changes one way or another.
Another possibility is to overcount jobs and undercount retirements. In January, there were 22 million people of retirement age who were still working.
The Fed’s hands are tied
Jobs’ data speaks for itself. That’s half of the Fed’s mandate. If work (unemployment) is relatively As strong as I expect, the Fed will have served that half of its term.
The other mandate of the Fed is price stability. Everyone on the planet knows that the Fed failed. Gets an F grade.
The Fed does not want another F rating. It will err on the side of caution unless there is a credit event or a large increase in unemployment.
Deglobalization, asset bubbles and fears of inflation add up to a Federal Reserve reluctant to cut. Higher rates and higher house prices will not stimulate that important cyclical aspect of the economy.
Cyclical components of GDP, the most important graph in macro
If you missed it, keep in mind Cyclical components of GDP, the most important graph in macro
My follow up article was A major housing crash is the key to understanding this recession
Housing causes recessions and recoveries and housing rates remain weak for a long time.
Add it all up and you get the opposite of the Covid recession, a long period of economic weakness with minimal increase in unemployment.
It doesn’t matter if you rate this as a recession or not. Also, the NBER may not even announce the recession until it’s over. That already happened once.
This post originated from MishTalk.Com
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